HOTCHKIS & WILEY VARIABLE TRUST, N-1A/A, 1998-01-28

HOTCHKIS & WILEY VARIABLE TRUST
N-1A/A, 1998-01-28

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<PAGE> 1

As filed with the Securities and Registration No. 333-24349
Exchange Commission on January 28, 1998. 811-08163

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]

Pre-Effective Amendment No. 2 [X]

Post-Effective Amendment No. [ ]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY

ACT OF 1940 [ ]

Amendment No. 2 [X]

(Check appropriate box or boxes)

------------------------
HOTCHKIS AND WILEY VARIABLE TRUST

(Exact name of registrant as specified in charter)

800 West 6th Street, Fifth Floor
Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (213) 362-8888

GRACIE FERMELIA
800 WEST 6TH STREET, FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
(Name and address of Agent for Service)

Approximate date of proposed public offering: As soon as practicable
after the effective date of the registration statement.

Title of Securities Being Registered...............Shares of Beneficial Interest

Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE> 2
HOTCHKIS AND WILEY VARIABLE TRUST
CROSS-REFERENCE SHEET
(REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
N-1A
Item No. Location in the Prospectus
- -------- --------------------------
<S> <C> <C>
Part A:

Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Information Not Applicable
Item 4. General Description of Registrant Cover Page; General
Information; Investment Objectives and Policies; Investment Risks;
Principal Investment Restrictions
Item 5. Management of the Fund Organization and Management; General Information
Item 5A. Management's Discussion of Fund Not Applicable
Performance
Item 6. Capital Stock and Other General Information; Dividends and Tax Status; Organization and Management
Securities
Item 7. Purchase of Securities Being Purchase and Redemption of Shares
Offered
Item 8. Redemption or Repurchase Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable

<CAPTION>
Part B: Location in the Statement of Additional Information
---------------------------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information about the Trust
Item 13. Investment Objectives and Investment Objectives and Policies
Policies
Item 14. Management of the Registrant Management
Item 15. Control Persons and Principal General Information about the Trust
Holders of Securities
Item 16. Investment Advisory and Other Management
Securities
Item 17. Brokerage Allocation and Other Management
Practices
Item 18. Capital Stock and Other General Information about the Trust
Securities
Item 19. Purchase, Redemption and Pricing Net Asset Value
of Securities Being Offered
Item 20. Tax Status Dividends and Tax Status
Item 21. Underwriters Not Applicable
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Statement of Assets
and Liabilities
</TABLE>

Part C:
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective
Amendment to the Registration Statement.
<PAGE> 3
HOTCHKIS AND WILEY VARIABLE TRUST
EQUITY INCOME VIP PORTFOLIO

FUND PROFILE

February 1, 1998

THIS FUND PROFILE CONTAINS KEY INFORMATION ABOUT THE FUND. IF YOU WOULD LIKE
MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING
PROSPECTUS. FOR DETAILS ABOUT THE FUND'S HOLDINGS OR RECENT INVESTMENT
STRATEGIES, PLEASE REVIEW THE FUND'S MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
THE REPORTS MAY BE OBTAINED AT NO COST BY CALLING THE FUND AT (800) 236-4479.

1. Objective

Equity Income VIP Portfolio (the "Fund") seeks to provide current income and
long-term growth of income, accompanied by growth of capital.

2. Investment Strategy

The Fund will attempt to achieve its objective by investing in domestic equity
securities (consisting of common stocks, convertible preferred stocks,
convertible debt securities or warrants). The Fund will invest at least 80% of
its total assets in income-producing equity securities issued by companies with
a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth.

3. Risks

The investment practices described above involve certain risks. The Fund's total
return may increase or decrease for reasons such as a change in the market price
of portfolio securities for a short or extended period. This means an investor's
shares may be worth more or less at redemption than at the time of purchase.

Also, the Fund may invest a small portion of its assets in non-investment grade
debt securities, commonly referred to as "junk bonds". These securities involve
greater credit risk than investment grade securities.

<PAGE> 4

4. Appropriateness

This Fund may be suitable for contractholders who have a long-term investment
and can tolerate fluctuations in value.

5. Fees and Expenses

The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.75% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all annual Fund expenses in excess of
1.15% of the Fund's average daily net assets.

Mortality and expense risk fees and other charges may be assessed by
Participating Insurance Companies to investors under the variable annuity
contracts or variable life insurance policies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on fees. The Separate Account prospectus sets out examples of
aggregate Fund and Separate Account charges.

6. Past Performance

As a newly created mutual fund, the Fund has no past performance.

7. Investment Advisor

Hotchkis and Wiley acts as Advisor to the Fund and generally adminsters the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
The Merrill Lynch Capital Management Group of Merrill Lynch Asset Management,
L.P. Gail Bardin and Sheldon Lieberman serve as the portfolio managers. They
have responsibility for the day-to-day management of the Fund's portfolio.

8. Purchases

Investors may not purchase shares of the Fund directly, but only through
variable annuity contracts and variable life insurance policies offered through
separate accounts of Participating Insurance Companies. Investors should refer
to the prospectus of the Participating Insurance Company's separate account for
information on how to purchase a variable annuity contract or variable life
insurance policy.

<PAGE> 5

9. Redemptions

Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through separate
accounts of Participating Insurance Companies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on how to redeem monies from the applicable contract or policy.

10. Distributions

The Fund expects to pay income dividends quarterly, which will be taxed as
ordinary income, if at all, to the Separate Account and not to contractholders.
Distributions of short-term gains also will be taxable as ordinary income, if at
all, to the Separate Account. Any net capital gains distributed to the Separate
Account are taxable as long-term capital gains regardless of the length of time
the Separate Account has owned shares. Dividends and distributions are paid in
full and fractional shares based on the net asset value per share at the close
of business on the record date.

11. Investor Services

Hotchkis and Wiley provides a number of investor services which may be obtained
by calling 800-236-4479.

<PAGE> 6

HOTCHKIS AND WILEY VARIABLE TRUST
INTERNATIONAL VIP PORTFOLIO

FUND PROFILE

February 1, 1998

1. Objective

International VIP Portfolio (the "Fund") seeks to provide current income and
long-term growth of income, accompanied by growth of capital.

2. Investment Strategy

The Fund will attempt to achieve its objective by investing at least 65% of its
total assets in international equity securities, including equity securities in
at least three developed non-U.S. markets. The equity securities may consist of
common stocks, convertible preferred stocks, convertible debt securities or
warrants.

Under normal market conditions, the Fund will invest at least 80% of its total
assets in income-producing equity securities issued by companies with a record
of earnings and dividends. The remainder of its portfolio may be invested in
securities of companies which pay no dividends or interest but have potential
for growth unrecognized by the market or changes in business or management that
indicate possible growth. The Fund will not invest in foreign fixed-income
securities with a maturity in excess of one year.

3. Risks

More specifically, investors in the Fund are exposed to risks of investing in
foreign securities, including currency exchange rate fluctuations, political
instability and greater price volatility and less liquidity of foreign
securities markets.

<PAGE> 7

4. Appropriateness

This Fund may be suitable for contractholders who have a long-term investment
and can tolerate fluctuations in value.

5. Fees and Expenses

6. Past Performance

As a newly created mutual fund, the Fund has no past performance.

7. Investment Advisor

Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
The Merrill Lynch Capital Management Group of Merrill Lynch Asset Management,
L.P. Sarah Ketterer, Harry Hartford and David Chambers serve as the portfolio
managers. They have responsibility for the day-to-day management of the Fund's
portfolio.

8. Purchases

<PAGE> 8

9. Redemptions

10. Distributions

The Fund expects to pay income dividends semi-annually, which will be taxed as
ordinary income, if at all, to the Separate Account and not to contractholders.
Distributions of short-term capital gains also will be taxable as ordinary
income, if at all, to the Separate Account. Any net capital gains distributed to
the Separate Account are taxable as long-term capital gains regardless of the
length of time the Separate Account has owned shares. Dividends and
distributions are paid in full and fractional shares based on the net asset
value per share at the close of business on the record date.

11. Investor Services

Hotchkis and Wiley provides a number of investor services which may be obtained
by calling 800-236-4479.

<PAGE> 9

HOTCHKIS AND WILEY VARIABLE TRUST
TOTAL RETURN BOND VIP PORTFOLIO

FUND PROFILE

February 1, 1998

1. Objectives

Total Return Bond VIP Portfolio (the "Fund") seeks to maximize long-term total
return.

2. Investment Strategy

The Fund will attempt to achieve its objective by investing in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years. Portfolio holdings will be concentrated in areas
of the bond market (based on quality, sector, coupon or maturity) which the
Advisor believes to be relatively undervalued. The types of securities that may
be purchased by the Fund include securities issued by domestic or foreign
entities, such as U.S. government securities, corporate debt securities,
mortgage - and other asset-backed securities. Under normal circumstances, at
least 70% of the Fund's net assets will be invested in investment grade debt
instruments.

3. Risks

The investment practices described above involve certain risks. The Fund's total
return may increase or decrease for reasons such as a change in interest rates
for a short or extended period. Bond prices typically fall as interest rates
rise. This means an investor's shares may be worth more or less at redemption
than at the time of purchase.

Investors also are exposed to credit risk, or the risk that a bond issuer will
fail to repay principal and pay interest.

The Fund may invest up to 15% of its assets in non-investment grade debt
securities, commonly referred to as "junk bonds". These securities involve
greater credit risk than investment grade securities.

<PAGE> 10

4. Appropriateness

This Fund may be suitable for contractholders who have a long-term investment
and can tolerate fluctuations in value.

5. Fees and Expenses

The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.55% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all annual Fund expenses in excess of
0.65% of the Fund's average daily net assets.

6. Past Performance

As a newly created mutual fund, the Fund has no past performance.

7. Investment Advisor

Hotchkis and Wiley acts as Advisor to the Fund and generally adminsters the
affairs of the Hotchkis and Wiley Variable Trust. The Advisor is a division of
The Merrill Lynch Capital Management Group of Merrill Lynch Asset Management,
L.P. Roger DeBard, Michael Sanchez and John Queen serve as the portfolio
managers. They have responsibility for the day-to-day management of the Fund's
portfolio.

8. Purchases

<PAGE> 11

9. Redemptions

10. Distributions

The Fund expects to declare income dividends daily and pay them monthly, which
will be taxed as ordinary income, if at all, to the Separate Account and not to
contractholders. Distributions of short-term capital gains also will be taxable
as ordinary income, if at all, to the Separate Account. Any net capital gains
distributed to the Separate Account are taxable as long-term capital gains
regardless of the length of time the Separate Account has owned shares.
Dividends and distributions are paid in full and fractional shares based on the
net asset value per share at the close of business on the record date.

11. Investor Services

Hotchkis and Wiley provides a number of investor services which may be obtained
by calling 800-236-4479.

<PAGE> 12

HOTCHKIS AND WILEY VARIABLE TRUST
LOW DURATION VIP PORTFOLIO

FUND PROFILE

February 1, 1998

1. Objectives

Low Duration VIP Portfolio (the "Fund") seeks to maximize total return,
consistent with preservation of capital.

2. Investment Strategy

The Fund will attempt to achieve its objective by investing in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of one to three years. The types of securities that may be purchased by
the Fund include securities issued by domestic or foreign entities, such as U.S.
government securities, corporate debt securities and mortgage - and other
asset-backed securities. The Fund's net assets primarily will be investment
grade.

3. Risks

The investment practices described above involve certain risks. The Fund's total
return may increase or decrease for reasons such as a change in interest rates
for a short or extended period. Bond prices typically fall as interest rates
rise. The total rate of return of this Fund is expected to exhibit less
volatility than that of a longer duration fixed-income fund. This means an
investor's price may be worth more or less at redemption than at the time of
purchase.

Investors also are exposed to credit risk, or the risk that a bond issuer will
fail to repay principal and pay interest.

The Fund may invest a small portion of its assets in non-investment grade debt
securities, commonly referred to as "junk bonds". These securities involve
greater credit risk than investment grade securities.

1
<PAGE> 13

4. Appropriateness

This Fund may be suitable for contractholders who have a long-term investment
and can tolerate fluctuations in value.

5. Fees and Expenses

The Advisor is paid a fee from the Fund's assets, computed daily and payable
monthly, at an annual rate of 0.46% of the Fund's average daily net assets. The
Advisor has voluntarily agreed to pay all Fund expenses in excess of 0.58% of
the Fund's average daily net assets.

6. Past Performance

As a newly created mutual fund, the Fund has no past performance.

7. Investment Adviser

Hotchkis and Wiley acts as Advisor to the Fund and generally administers the
affairs of the Hotchkis and Wiley Variable Trust. The Adviser is a division of
The Merrill Lynch Capital Management Group of Merrill Lynch Asset Management,
L.P. Roger DeBard, Michael Sanchez and John Queen serve as the portfolio
managers. They have responsibility for the day-to-day management of the Fund's
portfolio.

8. Purchases

<PAGE> 14

9. Redemptions

10. Distributions

11. Investor Services

Hotchkis and Wiley provides a number of investor services which may be obtained
by calling 800-236-4479.

3
<PAGE> 15
P R O S P E C T U S

[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]

HOTCHKIS AND WILEY VARIABLE TRUST (THE "TRUST") IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY HAVING FOUR SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"),
EACH OF WHICH IS A SEPARATE MUTUAL FUND. THE FUNDS ARE INVESTMENT VEHICLES FOR
VARIABLE ANNUITY CONTRACTS AND/OR VARIABLE LIFE INSURANCE CONTRACTS ISSUED BY
PARTICIPATING INSURANCE COMPANIES.

E Q U I T Y I N C O M E
V I P P O R T F O L I O

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests primarily in domestic equity securities.

I N T E R N A T I O N A L
V I P P O R T F O L I O

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in international equity securities.

T O T A L R E T U R N B O N D
V I P P O R T F O L I O

Seeks to maximize long-term total return. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years.

L O W D U R A T I O N
V I P P O R T F O L I O

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of one to three years.

- -------------------------------------------------------------------------------

This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated February 1, 1998,
containing additional information about the Trust and each Fund has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at 800-236-4479 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT
IN A FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

SHARES OF THE FUNDS ARE NOT OFFERED TO THE GENERAL PUBLIC BUT MAY ONLY BE
PURCHASED BY THE SEPARATE ACCOUNTS OF PARTICIPATING INSURANCE COMPANIES FOR THE
PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND/OR VARIABLE LIFE INSURANCE
CONTRACTS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY FUND WILL BE
ACHIEVED.

HOTCHKIS AND WILEY VARIABLE TRUST
800 West 6th Street, Fifth Floor, Los Angeles, California 90017
800-236-4479
Investment Advisor: Hotchkis and Wiley
Distributor: Merrill Lynch Funds Distributor, Inc.

February 1, 1998

- -------------------------------------------------------------------------------
<PAGE> 16
T A B L E O F C O N T E N T S
- -------------------------------------------------------------------------------

INVESTMENT OBJECTIVES AND POLICIES................ 3

SECURITIES AND TECHNIQUES USED BY THE FUNDS....... 7

INVESTMENT RISKS.................................. 13

PRINCIPAL INVESTMENT RESTRICTIONS................. 15

ORGANIZATION AND MANAGEMENT....................... 15

PURCHASE AND REDEMPTION OF SHARES................. 17

DIVIDENDS AND TAX STATUS.......................... 18

NET ASSET VALUE................................... 19

PERFORMANCE INFORMATION........................... 20

GENERAL INFORMATION............................... 21

APPENDIX -- DESCRIPTION OF RATINGS................ 22

[HOTCHKIS & WILEY LOGO]

IMPORTANT TELEPHONE NUMBER
---------------------------------------------------------
Client Services and Shareholder Inquiries 800-236-4479

<PAGE> 17

INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

GENERAL

Each Fund's investment objective is a fundamental policy, which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There can be no assurance that any objective will be met. For a
discussion of certain risks associated with investment in the Funds, including
their use of derivatives, see "Investment Risks" on page 13.

HOTCHKIS AND WILEY, a division of the Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management L.P. (the "Advisor"), acts as investment advisor
to each Fund.

THE EQUITY INCOME VIP PORTFOLIO

The investment objective of the EQUITY INCOME VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.

The EQUITY INCOME VIP PORTFOLIO will attempt to achieve its objective by
investing in equity securities. In selecting investments for the Fund, the
Advisor focuses on securities that it believes to have superior values. In
arriving at this determination, the Advisor will generally seek securities of
companies that have such characteristics as earnings yield at least 3% greater
than the yield on long-term bonds, dividend yield which exceeds the composite
yield on the securities comprising the Standard & Poor's Index of 500 Common
Stocks ("S&P 500"), and overall financial strength.

Under normal market conditions, the EQUITY INCOME VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest but have potential for growth unrecognized by the market or changes in
business or management that indicate possible growth.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities to be invested in by the Fund will be rated investment grade or, if
unrated, be of comparable quality in the opinion of the Advisor, provided,
however, that the Fund may invest up to 5% of its net assets in convertible
securities rated at least B by Moody's Investors Service ("Moody's") or Standard
& Poor's Ratings Group ("S&P") or, if unrated, of comparable quality in the
opinion of the Advisor. "Investment grade" means the debt securities have been
rated at least (i) Baa by Moody's or BBB by S&P, Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps"); (ii) A-2 by S&P,
Prime-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term
obligations; or (iii) of comparable quality as determined by the Advisor in the
case of unrated securities. All ratings are determined at the time of
investment. See the Appendix for a description of ratings.

Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 13.
Investors should carefully consider the relative risks associated with
investments in securities which carry lower ratings and in comparable unrated
securities.

3
<PAGE> 18

Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the sale of the
security, but the Advisor will consider such an event in determining whether the
Fund should continue to hold the security in its portfolio.

For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term (i.e., maturing or due in one year or less from date of
purchase) investment grade debt securities of the U.S. Government, its agencies
and instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes and repurchase agreements.

When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.

The EQUITY INCOME VIP PORTFOLIO can invest on a "global" basis, although it is
not required to. See "Securities and Techniques Used by the Funds -- Foreign
Securities" on page 8.

THE INTERNATIONAL VIP PORTFOLIO

The investment objective of the INTERNATIONAL VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.
The Fund will attempt to achieve its objective by investing at least 65% of its
total assets in equity securities in at least three non-U.S. markets.
Ordinarily, the Fund will invest in equity securities issued by companies
located in some or all of the developed foreign equity markets. These markets
generally include 15 markets in Europe as well as Australia, New Zealand, Japan,
Hong Kong, Singapore, Malaysia, Canada and South Korea. There are risks
associated with investment in foreign securities, as described under "Investment
Risks -- Risks of Investing in Emerging Market and Other Foreign Securities" on
page 13.

In selecting investments for the Fund, the Advisor will, in general, use the
same criteria as those used in selecting investments for the EQUITY INCOME VIP
PORTFOLIO; that is, it will focus on securities that it believes have superior
values. The Advisor will generally seek equity securities of companies in each
country that have such characteristics as dividend yield greater than the local
market average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.

Under normal market conditions, the INTERNATIONAL VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest, but have potential for growth unrecognized by the market or changes in
business or management that indicate possible growth. The Fund will not invest
in foreign fixed-income securities with a maturity in excess of one year.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.

For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term investment grade debt securities of the U.S. Government,
its agencies and instrumentalities, bank certificates of deposit, bankers'
acceptances, high quality commercial paper, demand notes and repurchase
agreements.

THE INTERNATIONAL VIP PORTFOLIO may purchase foreign currency options or enter
into forward foreign currency exchange contracts for the purpose of hedging
against

4
<PAGE> 19

the effect that currency fluctuations will have on the value of Fund assets or
liabilities. See "Securities and Techniques Used by the Funds -- Other
Derivative Instruments" on page 11.

THE FIXED-INCOME FUNDS:

THE TOTAL RETURN BOND VIP PORTFOLIO

The investment objective of the TOTAL RETURN BOND VIP PORTFOLIO is to maximize
long-term total return. The Fund invests in a diversified portfolio of fixed-
income securities of varying maturities with a portfolio duration of two to
eight years. Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) which the Advisor believes to be
relatively undervalued. The Advisor views bonds to be any interest-bearing
security that obligates the issuer to pay the bondholder specified sums of money
on specified dates and generally requires the issuer to repay the principal
amount of the loan at maturity.

THE LOW DURATION VIP PORTFOLIO

The investment objective of the LOW DURATION VIP PORTFOLIO is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of one to three years. The total rate of return for this Fund
is expected to exhibit less volatility than that of a longer duration
fixed-income fund such as the TOTAL RETURN BOND VIP PORTFOLIO.

INVESTMENT POLICIES OF THE FIXED-INCOME FUNDS

THE TOTAL RETURN BOND VIP PORTFOLIO and the LOW DURATION VIP PORTFOLIO (the
"FIXED-INCOME FUNDS") will attempt to achieve their objectives by investing in
the following types of securities which may be issued by domestic or foreign
entities: (i) U.S. Government securities; (ii) corporate debt securities,
including bonds, notes and debentures; (iii) corporate commercial paper; (iv)
mortgage- and other asset-backed securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs");
(v) variable and floating rate debt securities (including inverse floaters);
(vi) structured debentures, bonds and notes; (vii) bank certificates of deposit;
(viii) fixed time deposits and bankers' acceptances; (ix) repurchase agreements,
reverse repurchase agreements and dollar rolls; (x) preferred stock of issuers
whose assets consist of mortgage-backed securities of U.S. Government agencies;
(xi) debt securities that are convertible into or exchangeable for equity
securities ("convertible securities"); (xii) obligations of foreign governments
or their subdivisions, agencies and instrumentalities; and (xiii) obligations of
international agencies (such as the Agency for International Development) or
supranational entities. There is no limitation on the percentage of a Fund's
assets that may be committed to any of these types of securities, except to the
extent that a security may be deemed to be illiquid. See "Securities and
Techniques Used by the Funds" on page 7.

Under normal circumstances, the TOTAL RETURN BOND VIP PORTFOLIO will invest at
least 70% of its net assets in debt instruments rated at least investment grade.
For a description of "investment grade" see "THE EQUITY INCOME VIP PORTFOLIO."
Up to 15% of the TOTAL RETURN BOND VIP PORTFOLIO's net assets may be invested in
securities rated below investment grade but rated B or higher by one of the
nationally recognized rating agencies or, if unrated, of comparable quality in
the opinion of the Advisor.

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<PAGE> 20

Under normal circumstances, the LOW DURATION VIP PORTFOLIO will invest at least
70% of its net assets in securities rated at least: (i) A by Moody's, S&P, Fitch
or Duff & Phelps; (ii) A-2 by S&P, Prime-2 by Moody's, F-2 by Fitch or D-2 by
Duff & Phelps for short-term debt obligations; or (iii) of comparable quality as
determined by the Advisor in the case of unrated securities. Up to 10% of the
LOW DURATION VIP PORTFOLIO's net assets may be invested in securities rated
below investment grade but rated B or higher by one of the nationally recognized
rating agencies or, if unrated, of comparable quality in the opinion of the
Advisor. The remainder of the LOW DURATION VIP PORTFOLIO's investments will be
rated Baa or BBB by at least one of these rating agencies or, if unrated, of
comparable quality in the opinion of the Advisor.

After its purchase by one of the Funds, a security may be assigned a lower
rating or cease to be rated. This would not require the sale of the issue, but
the Advisor will consider such an event in determining whether the Fund should
continue to hold the security in the portfolio.

Each of the FIXED-INCOME FUNDS may invest up to 15% of its net assets in
emerging market foreign securities, which are generally considered to be of a
credit quality below investment grade.

Each of the FIXED-INCOME FUNDS may invest up to 25% of its total assets in
securities of foreign issuers that are denominated in U.S. dollars. Investment
by these Funds in securities of foreign issuers that are not denominated in U.S.
dollars will be limited to a maximum of 15% of each FIXED-INCOME FUND'S total
assets. See "Securities and Techniques Used by the Funds -- Foreign Securities"
on page 8.

The FIXED-INCOME FUNDS each invest in a diversified portfolio of fixed-income
securities with a different portfolio "duration." Duration is a commonly used
measure of the potential volatility of the price of a debt security, or the
aggregate market value of a portfolio of debt securities, prior to maturity.
Duration measures the magnitude of the change in price of a debt security
relative to a given change in the market interest rate. Duration incorporates a
bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure.

For any fixed-income security with interest payments occurring prior to the
payment of principal, duration is ordinarily less than maturity. In general, all
other things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. A Fund's computation of duration is based
on estimated rather than known factors. Thus, there can be no assurance that a
particular portfolio duration will at all times be achieved by the Fund.

Duration is used in the management of the FIXED-INCOME FUNDS as a tool to
measure interest rate risk. For example, a Fund with a 2-year duration would be
expected to change in value 2% for every 1% move in interest rates. Assuming an
expected average duration of 2 years for the LOW DURATION VIP PORTFOLIO, a 1%
decline in interest rates would cause the Fund to gain 2% in price; likewise, a
1% rise in interest rates would produce a decline of 2% in the Fund's price.
Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND VIP
PORTFOLIO, a 1% decline in interest rates would cause the Fund to gain 4.5% in
price; likewise, a 1% rise in interest rates would produce a decline of 4.5% in
the Fund's price. Other factors such as changes in credit quality, prepayments,
the shape of the yield curve and liquidity affect the net asset value of the
Funds and may be correlated with changes in interest rates. These factors can
exacerbate swings in the Funds' share prices during periods of volatile interest
rate changes.

For a more detailed discussion of duration, see "Investment Objectives and
Policies -- Duration" in the Statement of Additional Information.

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<PAGE> 21

SECURITIES AND TECHNIQUES USED BY THE FUNDS
- --------------------------------------------------------------------------------

The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.

U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.

All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.

Among the U.S. Government securities that may be purchased by the FIXED-INCOME
FUNDS are certain "mortgage-backed securities" of GNMA, the Federal Home Loan
Mortgage Corporation ("FHLMC") and FNMA. See the discussion of Mortgage-Related
Securities on page 10.

CORPORATE AND OTHER OBLIGATIONS
Each Fund may invest in corporate debt securities, variable and floating rate
debt securities and corporate commercial paper in the rating categories
described above. Floating rate securities normally have a rate of interest which
is set as a specific percentage of a designated base rate, such as the rate on
Treasury bonds or bills or the prime rate at a major commercial bank. The
interest rate on floating rate securities changes periodically when there is a
change in the designated base rate. Variable rate securities provide for a
specified periodic adjustment in the interest rate based on prevailing market
rates.

The FIXED-INCOME FUNDS may invest in structured debentures and structured notes,
which are hybrid instruments with characteristics of both bonds and swap
agreements. Like a bond, these securities make regular coupon payments and
generally have fixed principal amounts. However, the coupon payments are
typically tied to a swap agreement which can be affected by changes in a variety
of factors such as exchange rates, the shape of the yield curve and foreign
interest rates. Because of these factors, structured debentures and structured
notes can display price behavior that is more volatile than and often not
correlated to other fixed-income securities.

The FIXED-INCOME FUNDS may also invest in inverse floaters and tiered index
bonds. An inverse floater is a type of derivative that bears a floating or
variable interest rate that moves in the opposite direction to the interest rate
on another security or index level. Changes in the interest rate of the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. Tiered index bonds
are also a type of derivative instrument. The interest rate on a tiered index

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<PAGE> 22

bond is tied to a specified index or market rate. So long as this index or
market rate is below a predetermined "strike" rate, the interest rate on the
tiered index bond remains fixed. If, however, the specified index or market rate
rises above the "strike" rate, the interest rate on the tiered index bond will
decrease. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates. The market
for inverse floaters and tiered index bonds is relatively new. These corporate
debt obligations may have characteristics similar to those of mortgage-related
securities, but corporate debt obligations, unlike mortgage-related securities,
are not subject to prepayment risk other than through contractual call
provisions which generally impose a penalty for prepayment.

ASSET-BACKED SECURITIES
The FIXED-INCOME FUNDS may invest in securities whose principal and interest
payouts are backed by, or supported by, any of various types of assets. These
assets most typically include receivables related to the purchase of
automobiles, credit card loans, and home equity loans. These securities
generally take the form of a structured type of security, including
pass-through, pay-through, and stripped interest payout structures.

FOREIGN SECURITIES
Each Fund may invest in foreign securities. Foreign economies may differ from
the U.S. economy; individual foreign companies may differ from domestic
companies in the same industry; and foreign currencies may be stronger or weaker
than the U.S. dollar. The Advisor believes that the ability to invest abroad
will enable the Funds to take advantage of these differences when they are
favorable.

Fixed-income securities that may be purchased by the INTERNATIONAL and
FIXED-INCOME FUNDS include debt obligations issued or guaranteed by foreign
governments, their subdivisions, agencies or instrumentalities, or by
supranational entities that have been constituted by the governments of several
countries to promote economic development, such as The World Bank and The Asian
Development Bank. Foreign investment in certain foreign government debt is
restricted or controlled to varying degrees.

The FIXED-INCOME FUNDS may invest in fixed-income securities of issuers located
in emerging foreign markets. Such markets generally include every country in the
world other than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong
Kong, Singapore, South Korea and most Western European countries. From time to
time, emerging markets have offered the opportunity for higher returns but
involve a higher level of risk. Accordingly, the Advisor believes that the
FIXED-INCOME FUNDS' limited ability to invest in emerging markets throughout the
world may enable the Funds to obtain a wider range of attractive investment
opportunities. Emerging market securities include securities issued or
guaranteed by governments, their agencies, instrumentalities or central banks
("sovereign debt"); securities of issuers organized and operated to restructure
the investment characteristics of sovereign debt; securities of banks and other
business entities; and securities denominated in or indexed to currencies of
emerging markets. These securities include "Brady Bonds," which afford emerging
market countries a means to restructure their outstanding commercial bank debt.
Foreign governmental issuers of debt or the governmental authorities that
control repayment of the debt may be unable or unwilling to repay principal or
pay interest when due and all or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.

Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Funds, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.

There are risks in investing in emerging market and other foreign securities.
See "Investment Risks -- Risks

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<PAGE> 23

of Investing in Emerging Market and Other Foreign Securities" on page 13.

REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest.

REVERSE REPURCHASE AGREEMENTS
The FIXED-INCOME FUNDS may enter into reverse repurchase agreements, whereby a
Fund sells securities concurrently with entering into an agreement to repurchase
those securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by the Funds for purposes of
the percentage limitations applicable to borrowings.

DOLLAR ROLLS

The FIXED-INCOME FUNDS may use dollar rolls as part of their investment
strategy. In a dollar roll, a Fund sells securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar
securities (same type and coupon) on a specified future date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or cash equivalent security position that matures
on or before the forward settlement date of the dollar roll transaction.

The FIXED-INCOME FUNDS will establish a segregated account with the custodian in
which they will maintain cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, equal in value to
their obligations in respect of dollar rolls. Dollar rolls involve the risk that
the market value of the securities retained by the Fund may decline below the
price of the securities the Fund has sold but is obligated to repurchase under
the agreement. If the buyer of the securities under a dollar roll files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Dollar rolls are speculative techniques involving leverage and are considered
borrowings by the Funds, subject to their limitations on borrowings.

BORROWING
As a fundamental policy, the EQUITY INCOME and INTERNATIONAL VIP PORTFOLIOS may
borrow money, but only from banks for temporary or emergency purposes in amounts
not exceeding 10% of each Fund's total assets. The FIXED-INCOME FUNDS may borrow
for temporary, emergency or investment purposes. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. Borrowing subjects a Fund to
interest costs which may or may not be recovered by appreciation of the
securities purchased, and can exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. This is the
speculative factor known as leverage.

LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the FIXED-INCOME FUNDS may lend their
portfolio securities, provided: (i) the loan is secured continuously by
collateral consisting of short-term, high quality debt securities,

9
<PAGE> 24

including U.S. Government securities, negotiable certificates of deposit,
bankers' acceptances or letters of credit, maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (ii) the Fund may at any time call the loan and obtain
the return of the securities loaned; (iii) the Fund will receive any interest or
dividends paid on the loaned securities; and (iv) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of
the Fund.

WHEN-ISSUED SECURITIES
The INTERNATIONAL VIP PORTFOLIO and the FIXED-INCOME FUNDS may purchase
securities on a when-issued or delayed-delivery basis, generally in connection
with an underwriting or other offering. When-issued and delayed-delivery
transactions occur when securities are bought with payment for and delivery of
the securities scheduled to take place at a future time, beyond normal
settlement dates, generally from 15 to 45 days after the transaction. The price
that the Fund is obligated to pay on the settlement date may be different from
the market value on that date. While securities may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them, unless a sale would be desirable for investment
reasons. At the time the Fund makes a commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security each day in determining the Fund's net asset value. The Fund will also
establish a segregated account with its custodian in which it will hold cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, equal in value to its obligations for
when-issued securities.

SHORT SALES AGAINST-THE-BOX
Each Fund may make short sales of securities (i.e., sales of securities the Fund
does not own) or maintain a short position only if (i) at all times when the
short position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to, the
securities sold short (a short sale "against-the-box") and (ii) not more than
25% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time.

REAL ESTATE INVESTMENT TRUSTS
Each Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
Internal Revenue Code requirements. To qualify, a REIT must distribute at least
95% of its taxable income to its shareholders and receive at least 75% of that
income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. Like any investment in real estate, though, a REIT's performance depends
on several factors, such as its ability to find tenants for its properties, to
renew leases and to finance property purchases and renovations.

MORTGAGE-RELATED SECURITIES

The FIXED-INCOME FUNDS may invest in mortgage-related securities, including
mortgage pass-through securities and collateralized mortgage obligations.
Mortgage pass-through securities are securities representing interests in pools
of mortgages in which payments of both interest and principal on the securities
are generally made monthly, in effect "passing through" monthly payments made by
the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities). For
a discussion of certain risks associated with investment in mortgage-related
securities, including their volatility, see "Investment Risks -- Risks of
Investing in Fixed-Income Securities" on page 13.

Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which

10
<PAGE> 25

are supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.

CMOs, including CMOs that have elected to be treated as REMICs, are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.

Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The FIXED-INCOME FUNDS may invest in stripped
mortgage-backed securities issued by the U.S. Government, its agencies and
instrumentalities. Stripped mortgage-backed securities are usually structured
with two classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. In certain cases, one
class will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yields to maturity on IOs and POs are sensitive to the rate of
principal repayments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may not fully recoup its initial investment in
IOs. Conversely, if the underlying mortgage assets experience less than expected
prepayments of principal, the yield on POs could be materially adversely
affected. Such securities will be considered liquid only if so determined in
accordance with guidelines established by the Trustees. The FIXED-INCOME FUNDS
also may invest in stripped mortgage-backed securities that are privately
issued. These securities will be considered illiquid for purposes of each Fund's
limit on illiquid securities.

CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying a Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.

OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased only
by the FIXED-INCOME FUNDS, all Funds may utilize certain other financial
instruments whose performance is derived from the performance of an underlying
asset ("derivatives"). The Funds may purchase and write call and put options on
securities, securities indexes and on foreign currencies, and enter into futures
contracts and use options on futures contracts. The Funds also may enter into
swap agreements with other institutional investors with respect to foreign
currencies, interest rates and securities indexes. The Funds may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices or as part of

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<PAGE> 26

their overall investment strategies. Each Fund will maintain segregated accounts
consisting of cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under options, futures contracts and swap agreements to avoid
leveraging of the Fund. See "Investment Risks -- Risks of Using Certain
Derivatives" on page 14.

The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
Funds' investment or anticipated investment in securities denominated in foreign
currencies. A Fund will not enter into futures contracts or options thereon for
non-hedging purposes if, immediately thereafter, the aggregate initial margin
deposits on the Fund's futures positions and premiums paid for options thereon
would exceed 5% of the liquidation value of the Fund's total assets. There is no
other percentage limitation on a Fund's use of options, futures and options
thereon, except for the limitation on foreign currency option contracts
described below.

Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject to the Funds' overall limit that no more than 15% of net
assets may be invested in illiquid securities, and a Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.

The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. No Fund will
enter into foreign currency option contracts if the premiums on such options
exceed 5% of the Fund's total assets. See "Investment Objectives and Policies --
Derivative Instruments" in the Statement of Additional Information.

STATE INSURANCE REGULATION
Each Fund provides an investment vehicle for variable annuity contracts and
variable life insurance policies to be offered by the separate accounts of
participating life insurance companies ("Participating Insurance Companies").
Certain states have regulations concerning concentration of investments and
purchase and sale of futures contracts, among other techniques. If these
regulations are applied to a Fund, the Fund may be limited in its ability to
engage in such techniques and to manage its investments with the flexibility
provided herein. It is each Fund's intention to operate in material compliance
with current insurance laws and regulations, as applied in each jurisdiction in
which contracts or policies of separate accounts of Participating Insurance
Companies are offered.

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INVESTMENT RISKS
- --------------------------------------------------------------------------------

The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities. This means an
investor's price may be worth more or less at redemption than at the time of
purchase. The following provides a summary of the more significant risks
associated with investing in the Funds. The Statement of Additional Information
contains more detailed information about these investments and the risks that
are associated with them.

RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (i) currency devaluations and other currency exchange rate
fluctuations; (ii) political uncertainty and instability; (iii) more substantial
government involvement in the economy; (iv) higher rates of inflation; (v) less
government supervision and regulation of the securities markets and participants
in those markets; (vi) controls on foreign investment and limitations on
repatriation of invested capital and on a Fund's ability to exchange local
currencies for U.S. dollars; (vii) greater price volatility; (viii)
substantially less liquidity and significantly smaller capitalization of
securities markets; (ix) absence of uniform accounting and auditing standards;
(x) generally higher commission expenses; (xi) delay in settlement of securities
transactions; and (xii) greater difficulty in enforcing shareholder rights and
remedies.

RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Funds which invest in fixed-income securities are subject primarily to
interest rate and credit risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. The change in bond price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates than bonds with
shorter maturities. Credit risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Fund.

The FIXED-INCOME FUNDS may invest in mortgage- and asset-backed securities. The
yield characteristics of mortgage- and asset-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Fund purchases such a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase yield to maturity, while slower than expected
prepayments will reduce yield to maturity. Although the extent of prepayments on
a pool of mortgage loans depends on various economic and other factors, as a
general rule, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors
will predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.

The FIXED-INCOME FUNDS may invest in stripped mortgage- or asset-backed
securities, which receive differing proportions of the interest and principal
payments from the underlying assets. The market value of such securities

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<PAGE> 28

generally is more sensitive to changes in prepayment and interest rates than is
the case with traditional mortgage-and asset-backed securities, and in some
cases the market value may be extremely volatile. With respect to certain
stripped securities, such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower than anticipated may
result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade. Certain of the stripped
mortgage- and asset-backed securities held by the Funds are considered to be
illiquid under guidelines established by the Trustees.

Reverse repurchase agreements and dollar rolls, which the FIXED-INCOME FUNDS may
enter into, involve the risk that the market value of the securities retained by
the Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. If the buyer of securities under a
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.

The FIXED-INCOME FUNDS and, to a limited extent, the EQUITY INCOME VIP PORTFOLIO
may invest a portion of their assets in non-investment grade debt securities,
commonly referred to as "junk bonds." Low-rated and comparable unrated
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and changes in economic conditions than higher
quality bonds. In addition, low-rated and comparable unrated securities tend to
be less marketable than higher-quality debt securities because the market for
them is not as broad or active. The lack of a liquid secondary market may have
an adverse effect on market price and a Fund's ability to sell particular
securities.

RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (i) dependence on the Advisor's ability to predict
correctly movements in the direction of interest rates and securities prices;
(ii) imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being hedged;
(iii) the fact that skills needed to use these strategies are different from
those needed to select portfolio securities; (iv) the absence of a liquid
secondary market for any particular instrument at any time; (v) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (vi) the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell the security at a disadvantageous
time, due to the requirement that the Fund maintain "cover" or segregate
securities in connection with hedging transactions. The loss from investing in
futures transactions is potentially unlimited. There also is no assurance that a
liquid secondary market will exist for futures contracts and options thereon in
which a Fund may invest. See "Investment Objectives and Policies -- Derivative
Instruments" in the Statement of Additional Information.

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<PAGE> 29

PRINCIPAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not: (i) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities); (ii) with respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer; or (iii) invest more
than 25% of its total assets (determined at the time of investment) in one or
more issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. It is the position of the Securities
and Exchange Commission that open-end investment companies such as the Funds
should not make certain investments if thereafter more than 15% of the value of
their net assets would be invested in illiquid securities. As a matter of
operating policy (though not a fundamental policy), the Funds limit such
investments to no more than 15% of the value of their net assets. The
investments in this 15% limit include: (i) those which are restricted, i.e.,
those which cannot freely be sold for legal or contractual reasons; (ii) fixed
time deposits subject to withdrawal penalties (other than overnight deposits);
and (iii) repurchase agreements having a maturity of more than seven days. The
15% limitation does not include obligations which are payable at principal
amount plus accrued interest within seven days after purchase.

ORGANIZATION AND MANAGEMENT
- --------------------------------------------------------------------------------

ORGANIZATION AND VOTING RIGHTS
Each Fund is a newly established diversified series of Hotchkis and Wiley
Variable Trust (the "Trust"), an open-end, management investment company
organized as a Massachusetts business trust on February 4, 1997. The Trust's
Board of Trustees decides on matters of general policy and reviews the
activities of the Advisor, and the Trust's officers conduct and supervise the
daily business operations of the Trust. Each Fund is a series of shares, each
having separate assets and liabilities, of the Trust. The Board of Trustees may,
at its own discretion, create additional series of shares and classes within
series.

Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of each Fund, unless it is clear that the interests of each Fund in
the matter are identical or the matter does not affect a Fund. At the request of
the holders of at least 10% of the shares, the Trust will hold a meeting to vote
on the removal of a Trustee, which can occur by a vote of a majority of the
outstanding shares. Ten shareholders holding the lesser of $25,000 worth or one
percent of a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communications to all other
shareholders.

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<PAGE> 30

instructions are received from the holders of variable annuity contracts and
variable life insurance policies, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received. For a
further discussion, please refer to the insurance company's separate account
prospectus.

THE INVESTMENT ADVISOR
HOTCHKIS AND WILEY, located at 800 West 6th Street, Los Angeles, California
90017, acts as investment advisor to the Funds and generally administers the
affairs of the Trust. The Advisor is a division of the Merrill Lynch Capital
Management Group of Merrill Lynch Asset Management, L.P., and a separate
business unit of Merrill Lynch & Co., Inc., a financial services holding company
incorporated in Delaware. Subject to the direction and control of the Board of
Trustees, the Advisor supervises and arranges the purchase and sale of
securities held in the portfolios of the Funds.

For the services of the Advisor to the EQUITY INCOME VIP PORTFOLIO and the
INTERNATIONAL VIP PORTFOLIO, the Trust, under separate Investment Advisory
Agreements between the Trust and the Advisor, pays the Advisor a fee, computed
daily and payable monthly, at an annual rate of 0.75% of each Fund's average
daily net assets. This fee is higher than that paid by most mutual funds, but
does not reflect the reimbursement of certain of the Funds' expenses as
described below.

Under the Investment Advisory Agreement relating to the TOTAL RETURN BOND VIP
PORTFOLIO, the Trust pays a fee, computed daily and payable monthly, at an
annual rate of 0.55% of the Fund's average daily net assets.

Under the Investment Advisory Agreement relating to the LOW DURATION VIP
PORTFOLIO, the Trust pays the Advisor a fee, computed daily and payable monthly,
at an annual rate of 0.46% of the Fund's average daily net assets.

In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses including: (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of the
Trust's Trustees other than those affiliated with the Advisor; (v) legal and
audit expenses; (vi) fees and expenses of the Fund's custodian and any
subcustodian, shareholder servicing or transfer agent and accounting services
agent; (vii) expenses incident to the issuance of its shares, including issuance
on the payment of, or reinvestment of, dividends; (viii) fees and expenses
incident to the registration under federal or state securities laws of the Trust
or its shares; (ix) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Trust; (x) all other expenses
incident to holding meetings of the Trust's shareholders; (xi) dues or
assessments of or contributions to the Investment Company Institute or any
successor; and (xii) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto.

Although not required to do so, the Advisor has agreed to reimburse the EQUITY
INCOME VIP PORTFOLIO to the extent necessary so that its regular annual
operating expenses will not exceed 1.15% of the Fund's average daily net assets.
The Advisor has agreed to reimburse the INTERNATIONAL VIP PORTFOLIO to the
extent necessary so that its regular annual operating expenses will not exceed
1.35% of the Fund's average daily net assets. The Advisor has agreed to
reimburse the TOTAL RETURN BOND VIP PORTFOLIO to the extent necessary so that
its regular annual operating expenses will not exceed 0.65% of the Fund's
average daily net assets. The Advisor has agreed to reimburse the LOW DURATION
VIP PORTFOLIO to the extent necessary so that its regular annual operating
expenses will not exceed 0.58% of the Fund's average daily net assets. The
Advisor will give shareholders at least 30 days' notice of any decision to
change this reimbursement policy.

THE DISTRIBUTOR

Merrill Lynch Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor.

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<PAGE> 31

THE ADMINISTRATOR
Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202,
serves as administrator to the Trust pursuant to a Fund Administration Servicing
Agreement.

PORTFOLIO MANAGERS
The portfolio managers have responsibility for the day-to-day management of the
Funds' portfolios.

EQUITY INCOME VIP PORTFOLIO
The current portfolio managers of the EQUITY INCOME VIP PORTFOLIO are Gail
Bardin and Sheldon Lieberman. Ms. Bardin is a managing director of the Advisor
and has served as a portfolio manager of the Advisor since 1988. Mr. Lieberman
joined the Advisor in 1994. Prior to joining the Advisor, Mr. Lieberman was the
Chief Investment Officer for the Los Angeles County Employees Retirement
Association. Ms. Bardin and Mr. Lieberman have served as portfolio managers of
the Fund since its inception.

INTERNATIONAL VIP PORTFOLIO
The current portfolio managers of the INTERNATIONAL VIP PORTFOLIO are Sarah
Ketterer, Harry Hartford and David Chambers. Ms. Ketterer is a managing director
of the Advisor. Prior to joining the Advisor, Ms. Ketterer was with Bankers
Trust Company as an Associate from 1987 to 1990 and a Financial Analyst with
Dean Witter Reynolds from 1983 to 1985. Prior to joining the Advisor, Mr.
Hartford was with the Investment Bank of Ireland as a Senior Manager,
International and Global Equities, from 1985 to 1994. Prior to joining the
Advisor, Mr. Chambers was with Baring Asset Management, Inc. as Senior Vice
President, Global Equities from 1992 to 1995 and Baring Brothers, London,
England as Assistant Director, Corporate Finance from 1990 to 1991. Ms. Ketterer
and Messrs. Hartford and Chambers have served as portfolio managers to the Fund
since its inception.

FIXED-INCOME FUNDS
The current portfolio managers of the FIXED-INCOME FUNDS are Roger DeBard,
Michael Sanchez and John Queen. Mr. DeBard is a managing director of the Advisor
and has served as a portfolio manager of the Advisor since 1985. Mr. Sanchez
joined the Advisor in August 1996 as a portfolio manager. Prior to joining the
Advisor, Mr. Sanchez was with Provident Investment Counsel as a Senior Vice
President and portfolio manager from 1991 to 1995 and with ARCO Investment
Management Company as Director of Fixed Income Investments from 1988 to 1991.
Mr. Queen joined the Advisor in 1997 as a portfolio manager. Prior to joining
the Advisor, Mr. Queen was associated with the Capital Group as a member of an
analyst team responsible for $3 billion in fixed-income assets. They have served
as portfolio managers for each FIXED-INCOME FUND since its inception.

PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. Investors
should refer to the prospectus of the Participating Insurance Company's separate
account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds as investment
options for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.

The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Funds based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
and variable life insurance policies issued by the Participating Insurance
Companies) to be effected on that day

17
<PAGE> 32

pursuant to variable annuity contracts and variable life insurance policies.
Orders received by the Funds are effected on business days only. Orders for the
purchase of shares of a Fund are effected at the net asset value per share next
calculated after an order is received in proper form by the Fund or its designee
so long as payment for the shares is received by the end of the next business
day. Redemptions are effected at the net asset value per share next calculated
after receipt in proper form of a redemption request by a Fund or its designee.
For purposes of the purchase and redemption of shares of the Funds, the separate
account of a Participating Insurance Company shall be a designee of the Fund for
receipt of requests for purchase and redemption, and receipt by such designee
shall constitute receipt by the Fund, provided that the Fund receives notice of
such requests in accordance with applicable requirements on the next following
business day. Separate accounts must transmit purchase and redemption orders
promptly. Payment for redemptions will be made by the Funds within seven days
after the request is received. The Funds may suspend the right of redemption
under certain extraordinary circumstances in accordance with the rules of the
Securities and Exchange Commission.

The Funds do not assess any sales charges or redemption fees. Mortality and
expense risk fees and other charges may be assessed by Participating Insurance
Companies under the variable annuity contracts or variable life insurance
policies. The Participating Insurance Companies are required to describe these
fees in the prospectuses for the contracts or policies.

Shares of the Funds may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Funds currently do not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies of
Participating Insurance Companies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts between the Participating Insurance Companies. Nevertheless, the
Trustees will monitor events to seek to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material irreconcilable
conflict arise between the holders of variable annuity contracts and variable
life insurance policies of Participating Insurance Companies, the Participating
Insurance Companies may be required to withdraw the assets allocable to some or
all of the separate accounts from the Funds. Any such withdrawal could disrupt
orderly portfolio management to the potential detriment of such holders. The
variable annuity contracts and variable life insurance policies are described in
the separate prospectuses issued by the Participating Insurance Companies. The
Funds assume no responsibility for such prospectuses.

DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------

The discussion of the federal income taxation of the Funds and their
distributions is for general information only. Purchasers of variable annuity
contracts or variable life insurance policies issued by Participating Insurance
Companies should refer to the prospectuses of those contracts or policies for
additional tax information.

The EQUITY INCOME VIP PORTFOLIO expects to pay income dividends quarterly; the
INTERNATIONAL VIP PORTFOLIO expects to pay income dividends semi-annually; and
the FIXED-INCOME FUNDS expect to declare income dividends daily and pay them
monthly.

Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year.

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<PAGE> 33

Dividends and distributions are paid in full and fractional shares of each Fund
based on the net asset value per share at the close of business on the record
date, unless the shareholder requests, in writing to the Trust, payment in cash.
The Trust will notify each shareholder after the close of its fiscal year of
both the dollar amount and the tax status of that year's distributions.

Each Fund will be treated as a separate entity for federal tax purposes. The
Funds intend to elect to qualify and remain qualified as regulated investment
companies under Subchapter M of the Internal Revenue Code (the "Code"). If so
qualified, each Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year
which it distributes to its shareholders provided that at least 90% of its net
investment income earned in the fiscal year is distributed.

A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests set forth
in the Code and U.S. Treasury regulations. If, as is intended, each Fund meets
these tests and complies with certain other conditions, a segregated asset
account investing solely in shares of a Fund will also be deemed to meet these
diversification requirements. However, a failure of a Fund to qualify as a
regulated investment company or to meet such conditions and to comply with such
tests could cause the owners of variable annuity contracts and variable life
insurance policies based on such accounts to recognize ordinary income each year
in the amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).

Provided that a Fund and a segregated asset account investing in the Fund
satisfy the above requirements, any distributions from the Fund will be exempt
from current federal income taxation to the extent that such distributions
accumulate in an individual's variable annuity contract or an individual's
variable life insurance contract.

The Code provides for a dividends-received deduction (the "deduction")
applicable to corporations, including insurance companies. Special provisions
are contained in the Code as to the eligibility of dividends for the deduction.
The basic test under the Code for determining the extent to which the dividends
paid by each Fund are eligible for the deduction is the extent to which the
Fund's income is derived from qualifying dividends received from domestic
corporations. See "Dividends and Tax Status" in the Statement of Additional
Information for additional information about the deduction.

Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors. If more than 50% of the value of the INTERNATIONAL VIP
PORTFOLIO'S total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund may elect to enable shareholders of the Fund
to receive the benefit of the foreign tax credit with respect to any foreign
income taxes paid by the Fund.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time), except on
days on which no orders to purchase, sell or redeem shares have been

19
<PAGE> 34

received or days on which changes in the value of a Fund's portfolio securities
do not materially affect the net asset value. The net asset value per share is
the value of a Fund's assets, less its liabilities, divided by the number of
shares of the Fund outstanding. The value of a Fund's portfolio securities is
determined on the basis of the market value of such securities or, if market
quotations are not readily available, at fair value under guidelines established
by the Trustees. Short-term investments maturing in less than 60 days are valued
at amortized cost which the Board has determined to equal fair value. See "Net
Asset Value" in the Statement of Additional Information for further information.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

Each Fund's performance may be quoted in advertising, shareholder reports and
other communications in terms of yield or total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yield and total rates of return fluctuate in response to market conditions and
other factors, and the value of an investor's shares when redeemed may be more
or less than their original cost.

Each Fund may provide its period and average annualized "total rates of return."
The "total rate of return" refers to the change in the value of an investment in
the Fund over a stated period and reflects any change in net asset value per
share and is compounded to include the value of any shares purchased with any
dividends or capital gains declared during such period. Period total rates of
return may be "annualized." An "annualized" total rate of return assumes that
the period total rate of return is generated over a one-year period.

Each Fund may provide annualized "yield" quotations. The "yield" of a Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one-year period and is shown as a percentage of the maximum public
offering price on the last day of that period. A "yield" quotation, unlike a
total rate of return quotation, does not reflect changes in net asset value.

Yields and total returns quoted for the Funds include the effect of deducting
the Funds' expenses, but may not include charges and expenses attributable to a
particular variable annuity contract or variable life insurance policy. Since
shares of the Funds can be purchased only through a variable annuity contract or
variable life insurance policy, a prospective purchaser should carefully review
the prospectus of the variable annuity contract or variable life insurance
policy he or she has chosen for information on relevant charges and expenses.
Including these charges in the quotations of the Funds' yield and total return
would have the effect of decreasing performance. Performance information for the
Funds must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Funds. See the
Statement of Additional Information for more information concerning the
calculation of yield and total rate of return quotations for the Funds.

All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.

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<PAGE> 35

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Massachusetts law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances, the risk of a shareholder incurring financial loss
on account of shareholder liability is highly unlikely and is limited to the
relatively remote circumstances in which the Trust would be unable to meet its
obligations.

Common expenses incurred by the Trust are allocated among the Funds based upon
(i) relative net assets; (ii) as incurred on a specific identification basis; or
(iii) evenly among the Funds, depending on the nature of the expenditure.

Except for (i) changes which do not adversely affect the rights of Trust
shareholders; (ii) a change in the name of the Trust, or a series or class
thereof; (iii) authorization of a new series or class; (iv) changes to supply
any omission or correct any ambiguous or defective provision; or (v) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trust's outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.

The Trust's custodian is Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 and its subcustodian for foreign securities is The
Chase Manhattan Bank, N.A., Four Chase MetroTech Center, Brooklyn, New York
11245.

As of the date of this Prospectus, the Advisor owned all of the outstanding
shares of the Funds.

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<PAGE> 36

APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------

MOODY'S INVESTORS SERVICE
- ----------------------------------------------------------
BOND RATINGS:

"AAA" -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

"AA" -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.

Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.

"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.

"BAA" -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

"BA" -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

"B" -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.

"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.

STANDARD & POOR'S
RATINGS GROUP
- ----------------------------------------------------------
BOND RATINGS:

"AAA" -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

"AA" -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

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<PAGE> 37

"A" -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

"BBB" -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.

- ----------------------------------------------------------
COMMERCIAL PAPER RATINGS:

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

"A-1" -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

FITCH INVESTORS SERVICE, INC.
- ----------------------------------------------------------
BOND RATINGS:

The following summarizes the ratings used by Fitch for corporate bonds:

"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."

"A" -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

"BBB" -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.

"BB" -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.

"B" -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

PLUS (+) MINUS (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of

23
<PAGE> 38

a credit within the rating category. Plus and minus signs, however, are not used
in the "AAA" category.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:

"F-1+" -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

"F-1" -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."

"F-2" -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.

DUFF & PHELPS
CREDIT RATING CO.
- ----------------------------------------------------------
BOND RATINGS:

The following summarizes the ratings used by Duff & Phelps for long-term debt:

"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.

"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

"BBB+," "BBB," "BBB-" -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:

"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.

"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.

"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

24
<PAGE> 39
- -------------------------------------------------------------------------------

PROSPECTUS

February 1, 1998

HOTCHKIS
AND
WILEY
VARIABLE TRUST

800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479

INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017

LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202

DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536

ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202

[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]

HOTCHKIS
AND
WILEY
VARIABLE TRUST

Equity Income VIP Portfolio
--------------------------------
International VIP Portfolio
--------------------------------
Total Return Bond VIP Portfolio
--------------------------------
Low Duration VIP Portfolio
--------------------------------

Hotchkis and Wiley: Investment Advisor

- -------------------------------------------------------------------------------
<PAGE> 40

HOTCHKIS AND WILEY VARIABLE TRUST

STATEMENT OF ADDITIONAL INFORMATION

DATED FEBRUARY 1, 1998

The Hotchkis and Wiley Variable Trust (the "Trust") is an investment company
which offers shares of four investment funds -- Equity Income VIP Portfolio,
International VIP Portfolio, Total Return Bond VIP Portfolio and Low Duration
VIP Portfolio (each, a "Fund" and collectively, the "Funds"). The Total Return
Bond VIP Portfolio and the Low Duration VIP Portfolio are sometimes also
referred to as the "Fixed-Income Funds." The shares of the Funds are offered
only to separate accounts of participating life insurance companies
("Participating Insurance Companies") for the purpose of funding variable
annuity contracts and variable life insurance contracts.

This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated February 1, 1998 of the Funds.
Copies of the prospectus may be obtained at no charge from the Trust, 800 West
6th Street, Los Angeles, CA 90017. Hotchkis and Wiley (the "Advisor") is the
investment advisor to the Funds.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................................... B-2
Investment Restrictions.................................................................. B-2
Repurchase Agreements.................................................................... B-3
U.S. Government Securities............................................................... B-3
Corporate Debt Securities................................................................ B-4
Convertible Securities................................................................... B-4
Mortgage-Related Securities.............................................................. B-5
Asset-Backed Securities.................................................................. B-8
Risk Factors Relating to Investing in Mortgage-Related and Asset-Backed Securities....... B-8
Duration................................................................................. B-9
Effective Maturity....................................................................... B-10
Derivative Instruments................................................................... B-10
Foreign Securities....................................................................... B-14
Foreign Currency Options and Related Risks............................................... B-16
Forward Foreign Currency Exchange Contracts.............................................. B-17
Risk Factors Relating to Investing in High Yield Securities.............................. B-19
Illiquid Securities...................................................................... B-20
Management................................................................................. B-21
The Advisor.............................................................................. B-23
The Distributor.......................................................................... B-23
Portfolio Transactions and Brokerage..................................................... B-23
Net Asset Value............................................................................ B-24
Dividends and Tax Status................................................................... B-25
Performance Information.................................................................... B-27
General Information About the Trust........................................................ B-28
Report of Independent Accountants.......................................................... B-30
Statement of Assets and Liabilities........................................................ B-31
</TABLE>

B-1
<PAGE> 41

INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Equity Income VIP Portfolio is to provide
current income and long-term growth of income, accompanied by growth of capital.

The investment objective of the International VIP Portfolio is to provide
current income and long-term growth of income, accompanied by growth of capital.

The investment objective of the Total Return Bond VIP Portfolio is to maximize
long-term total return.

The investment objective of the Low Duration VIP Portfolio is to maximize total
return, consistent with preservation of capital.

The portfolio and strategies with respect to the composition of each Fund are
described in the Funds' prospectus.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following restrictions (in addition to those indicated
in the prospectus) as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority" of that Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940 (the "1940 Act").
Under the 1940 Act, the vote of the holders of a "majority" of a Fund's
outstanding voting securities means the vote of the holders of the lesser of (i)
67% of the shares of the Fund represented at a meeting at which the holders of
more than 50% of its outstanding shares are represented or (ii) more than 50% of
the outstanding shares.

Except as noted, none of the Funds may:

1. Purchase any security, other than obligations of the U.S. Government, its
agencies, or instrumentalities ("U.S. Government securities"), if as a
result: (i) with respect to 75% of its total assets, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer; or (ii) more than 25% of the
Fund's total assets (determined at the time of investment) would be invested
in one or more issuers having their principal business activities in a
single industry.

2. Purchase securities on margin (but any Fund may obtain such short-term
credits as may be necessary for the clearance of transactions), provided
that the deposit or payment by a Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.

3. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short (short sale against-the-box), and
unless not more than 25% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.

4. Issue senior securities, borrow money or pledge its assets except that any
Fund may borrow from a bank for temporary or emergency purposes in amounts
not exceeding 10% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed) and pledge its assets to secure
such borrowings; none of the Funds (except the Fixed-Income Funds) will
purchase any additional portfolio securities while such borrowings are
outstanding. (The Fixed-Income Funds may borrow from banks or enter into
reverse repurchase agreements and pledge assets in connection therewith, but
only if immediately after each borrowing there is asset coverage of 300%.)

B-2
<PAGE> 42

5. Purchase any security (other than U.S. Government securities) if as a
result, with respect to 75% of the Fund's total assets, the Fund would then
hold more than 10% of the outstanding voting securities of an issuer.

6. Buy or sell commodities or commodity contracts or real estate or interests
in real estate, although it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in
real estate. (For the purposes of this restriction, forward foreign currency
exchange contracts are not deemed to be commodities or commodity contracts.
This restriction does not apply to the Fixed-Income Funds.)

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.

8. Make investments for the purpose of exercising control or management.

9. Participate on a joint or joint and several basis in any trading account in
securities.

10. Make loans, except through repurchase agreements. (This restriction does not
apply to the Fixed-Income Funds, which may lend portfolio securities having
an aggregate market value of up to one-third of the total assets of the
Fund.)

REPURCHASE AGREEMENTS

Each of the Funds may invest in repurchase agreements collaterized by U.S.
Government securities. A repurchase agreement is an agreement where the seller
agrees to repurchase a security from a Fund at a mutually agreed-upon time and
price. The period of maturity is usually quite short, possibly overnight or a
few days, although it may extend over a number of months. The resale price is
more than the purchase price, reflecting an agreed-upon rate of return effective
for the period of time a Fund's money is invested in the repurchase agreement. A
Fund's repurchase agreements will at all time be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, a Fund will require
additional collateral. In the event of a default, insolvency or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. In such
circumstances, the Fund could experience a delay or be prevented from disposing
of the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

U.S. GOVERNMENT SECURITIES

U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Tennessee Valley Authority, Inter-American Development Bank,
Asian Development Bank, Student Loan Marketing Association and the International
Bank for Reconstruction and Development.

Except for U.S. Treasury securities, obligations of U.S. Government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some are backed by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. Government to purchase
the agencies' obligations; while still others, such as the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
In the case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does

B-3
<PAGE> 43

not meet its commitment. Each Fund will invest in securities of such
instrumentality only when the Advisor is satisfied that the credit risk with
respect to any instrumentality is acceptable.

The Funds may invest in component parts of U.S. Treasury notes or bonds, namely,
either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of: (i) Treasury obligations from which the interest coupons
have been stripped; (ii) the interest coupons that are stripped; (iii)
book-entries at a Federal Reserve member bank representing ownership of Treasury
obligation components; or (iv) receipts evidencing the component parts (corpus
or coupons) of Treasury obligations that have not actually been stripped. Such
receipts evidence ownership of component parts of Treasury obligations (corpus
or coupons) purchased by a third party (typically an investment banking firm)
and held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.

CORPORATE DEBT SECURITIES

A Fund's investments in U.S. dollar or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments) which meet the minimum ratings criteria set forth for the Fund, or,
if unrated, are in the Advisor's opinion comparable in quality to corporate debt
securities in which the Fund may invest. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.

CONVERTIBLE SECURITIES

The Funds may invest in convertible securities of domestic or foreign issuers,
which meet the ratings criteria set forth in the Prospectus. A convertible
security is a fixed-income security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time into a certain
quantity of common stock or other equity securities of the same or a different
issuer. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. While providing a fixed-income stream (generally higher in yield
than the income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation attendant upon a market price advance in the convertible
security's underlying common stock.

In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying stock).
As a fixed-income security, a convertible security tends to increase in market
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying common stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities generally entail less risk than investments in the
common stock of the same issuer.

B-4
<PAGE> 44

MORTGAGE-RELATED SECURITIES

The Fixed-Income Funds may invest in residential or commercial mortgage-related
securities, including mortgage pass-through securities, collateralized mortgage
obligations ("CMOs"), adjustable rate mortgage securities, CMO residuals,
stripped mortgage-related securities, floating and inverse floating rate
securities and tiered index bonds.

Mortgage Pass-Through Securities. Mortgage pass-through securities represent
interests in pools of mortgages in which payments of both principal and interest
on the securities are generally made monthly, in effect "passing through"
monthly payments made by borrowers on the residential or commercial mortgage
loans which underlie the securities (net of any fees paid to the issuer or
guarantor of the securities). Mortgage pass-through securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment, the value of the premium would be lost.

There are currently three types of mortgage pass-through securities: (i) those
issued by the U.S. Government or one of its agencies or instrumentalities, such
as the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"); (ii) those issued by private issuers that represent an interest in or
are collateralized by pass-through securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (iii) those issued
by private issuers that represent an interest in or are collateralized by whole
mortgage loans or pass-through securities without a government guarantee but
usually having some form of private credit enhancement.

GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by the institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of FHA-insured or VA-guaranteed mortgages.

Obligations of FNMA and FHLMC are not backed by the full faith and credit of the
United States Government. In the case of obligations not backed by the full
faith and credit of the United States Government, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment.
FNMA and FHLMC may borrow from the U.S. Treasury to meet its obligations, but
the U.S. Treasury is under no obligation to lend to FNMA or FHLMC.

Private mortgage pass-through securities are structured similarly to GNMA, FNMA,
and FHLMC mortgage pass-through securities and are issued by originators of and
investors in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing.

Pools created by private mortgage pass-through issuers generally offer a higher
rate of interest than government and government-related pools because there are
no direct or indirect government or agency guarantees of payments in the private
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. The insurance and guarantees and the credit worthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Funds' investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Private

B-5
<PAGE> 45

mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Advisor determines that the securities
meet the Fund's quality standards.

Collateralized Mortgage Obligations. CMOs are debt obligations collateralized by
residential or commercial mortgage loans or residential or commercial mortgage
pass-through securities. Interest and prepaid principal are generally paid
monthly. CMOs may be collateralized by whole mortgage loans or private mortgage
pass-through securities but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs also include REMICs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection through
a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies pursuant to a
rule adopted by the Securities and Exchange Commission ("SEC"), and the Funds
may invest in the securities of such issuers without the limitations imposed by
the 1940 Act on investments by the Fund in other investment companies. In
addition, in reliance on an earlier SEC interpretation, the Fund's investments
in certain other qualifying CMOs, which cannot or do not rely on the rule, are
also not subject to the limitation of the 1940 Act on acquiring interests in
other investment companies. In order to be able to rely on the SEC's
interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (i)
invest primarily in mortgage-backed securities; (ii) do not issue redeemable
securities; (iii) operate under general exemptive orders exempting them from all
provisions of the 1940 Act; and (iv) are not registered or regulated under the
1940 Act as investment companies. To the extent that the Funds select CMOs that
cannot rely on the rule or do not meet the above requirements, the Funds may not
invest more than 10% of their assets in all such entities and may not acquire
more than 3% of the voting securities of any single such entity.

The Fixed-Income Funds may also invest in, among other things, parallel pay
CMOs, Planned Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and
floating rate CMOs. Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC bonds generally
require payments of a specified amount of principal on each payment date.
Sequential pay CMOs generally pay principal to only one class while paying
interest to several classes. Floating rate CMOs are securities whose coupon rate
fluctuates according to some formula related to an existing market index or
rate. Typical indices would include the eleventh district cost-of-funds index
("COFI"), the London Interbank Offered Rate ("LIBOR"), one-year Treasury yields,
and ten-year Treasury yields.

Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

B-6
<PAGE> 46

The ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. In the event that
market rates of interest rise more rapidly to levels above that of the ARM's
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely have
fallen.

Certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is then utilized to reduce the outstanding principal
balance of the ARM.

CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act. CMO residuals, whether or not registered under such Act, may
be subject to certain restrictions on transferability, and may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.

Stripped Mortgage-Related Securities. Stripped mortgage-related securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose entities
of the foregoing.

B-7
<PAGE> 47

SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the "IO" class), while the
other class will receive all of the principal (the PO class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rating categories.

Although SMBSs are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently introduced. As a result, established trading markets have not yet
been fully developed and accordingly, these securities may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities. See
"Securities and Techniques Used by the Funds -- Mortgage-Related Securities" in
the Prospectus.

Inverse Floaters. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction to the interest rate
on another security or index level. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.

ASSET-BACKED SECURITIES

The Fixed-Income Funds may invest in various types of asset-backed securities.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity loans,
are being securitized in pass-through structures similar to the mortgage
pass-through or in a pay-through structure similar to the CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objectives and policies of the Funds.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage-related and asset-backed securities differ
from traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Funds
purchase such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the

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opposite effect of increasing yield to maturity. Alternatively, if the Funds
purchase these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
The Funds may invest a portion of their assets in derivative mortgage-related
securities which are highly sensitive to changes in prepayment and interest
rates. The Advisor will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and through hedging techniques.

During periods of declining interest rates, prepayment of mortgages underlying
mortgage-related securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in high-yielding mortgage-related securities will
be affected by reductions in the principal amount of such securities resulting
from such prepayments, and its ability to reinvest the returns of principal at
comparable yields is subject to generally prevailing interest rates at that
time. Conversely, slower than expected prepayments may effectively change a
security that was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities tend to fluctuate more in
response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.

Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.

DURATION

In selecting securities for the Fixed-Income Funds, the Advisor makes use of the
concept of duration for fixed-income securities. Duration is a measure of the
expected life of a fixed-income security. Duration incorporates a bond's yield,
coupon interest payments, final maturity and call features into one measure.
Most debt obligations provide interest ("coupon") payments in addition to a
final ("par") payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates.

Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any fixed-income security with interest payments occurring prior to the payment
of principal, duration is always less than maturity. In general, all other
things being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.

Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen a Fund's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.

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<PAGE> 49

Short futures or put options positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.

There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Advisor will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.

EFFECTIVE MATURITY

The Fixed-Income Funds each invest in a diversified portfolio of fixed-income
securities of varying maturities. The effective maturity is the weighted average
period over which a security's principal is expected to be paid. Stated maturity
is the date when the issuer is scheduled to make the final payment of principal.
Effective maturity differs from stated maturity in that it estimates the
anticipated effect of expected principal prepayments and call provisions.

The effective maturity of a debt security will be the stated maturity, except:
(1) in the case of a security with a call provision, the maturity date will be
considered the call date if there is a high probability, in the opinion of the
Advisor, that the security will be called; (2) in the case of securities with
unconditional put provisions entitling the security holder to receive the
security's approximate amortized cost, the maturity will be considered to be the
next put date; (3) in the case of mortgage-backed or other amortizing
securities, the maturity will be considered to be the average life remaining
(the length of time it is expected to take to retire half of the remaining
principal through amortizing payments) based on prepayment assumptions that the
Advisor believes appropriate; and (4) in the case of a variable or floating rate
investment grade security which, in the Advisor's opinion, will have a market
value approximating amortized cost on the next interest rate reset date, the
maturity will be considered to be the next reset date. However, no Fixed-Income
Fund will invest more than 5% of its net assets at the time of purchase in
floating or variable rate instruments of any one issuer, nor invest more than
20% of its net assets at the time of purchase in floating or variable rate
instruments of issuers within the same industry.

DERIVATIVE INSTRUMENTS

As indicated in the Prospectus, to the extent consistent with their investment
objectives and policies, the Funds may purchase and write call and put options
on securities, securities indexes and on foreign currencies and enter into
futures contracts and use options on futures contracts. The Funds also may enter
into swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Funds may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates, or securities prices or as
part of their overall investment strategies. The International VIP Portfolio and
the Fixed-Income Funds may also purchase and sell options relating to foreign
currencies for the purpose of increasing exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country to another.
Each Fund will maintain segregated accounts consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under options and
futures contracts to avoid leveraging of the Fund.

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<PAGE> 50

Options on Securities and on Securities Indexes. A Fund may purchase put options
on securities to protect holdings in an underlying or related security against a
substantial decline in market value. A Fund may purchase call options on
securities to protect against substantial increases in prices of securities the
Fund intends to purchase pending its ability to invest in such securities in an
orderly manner. A Fund may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. A Fund may write a call or
put option only if the option is "covered" by the Fund holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of the Fund's obligation as writer of the option. Prior to exercise
or expiration, an option may be closed out by an offsetting purchase or sale of
an option of the same series.

The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
securities decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Fund is not sold when it has remaining value, and if the
market price of the underlying security, in the case of a put, remains equal to
or greater than the exercise price or, in the case of a call, remains less than
or equal to the exercise price, the Fund will lose its entire investment in the
option. Also, where a put or call option on a particular security is purchased
to hedge against price movements in a related security, the price of the put or
call option may move more or less than the price of the related security. There
can be no assurance that a liquid market will exist when a Fund seeks to close
out an option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, a Fund may be unable to close out a position.

There are several risks associated with transactions in options on securities
and on indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. If a Fund were unable to close out an option that
it had purchased on a security, it would have to exercise the option in order to
realize any profit or the option may expire worthless. If a Fund were unable to
close out a covered call option that it had written on a security, it would not
be able to sell the underlying security unless the option expired without
exercise. As the writer of a covered call option, a Fund forgoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
exercise price of the call.

If trading were suspended in an option purchased by a Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it had purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

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<PAGE> 51

Futures Contracts and Options on Futures Contracts. A Fund may use interest
rate, foreign currency or index futures contracts, as specified for that Fund in
the Prospectus. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, foreign currency or the cash value
of an index at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies, including: the S&P 500; the S&P 100; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit; the
Australian dollar; the Canadian dollar; the British pound; the German mark; the
Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other futures contracts will be developed and traded in the
future.

A Fund may purchase and write call and put options on futures. Options on
futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.

Each Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, a Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. A Fund's hedging activities may include sales of futures contracts as
an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
that Fund's exposure to interest rate fluctuations, the Fund may be able to
hedge its exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.

A Fund will only enter into futures contracts and options on futures contracts
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.

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A Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

Limitations on Use of Futures and Options Thereon. When purchasing a futures
contract, a Fund will maintain with its custodian (and mark-to-market on a daily
basis) cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets that, when added to the amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract. Alternatively, the Fund may "cover" its position by purchasing a put
option on the same futures contract with a strike price as high or higher than
the price of the contract held by the Fund.

When selling a futures contract, a Fund will maintain with its custodian (and
mark-to-market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).

When selling a call option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.

When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.

In order to comply with current applicable regulations of the CFTC pursuant to
which the Trust avoids being deemed a "commodity pool operator," the Funds are
limited in their futures trading activities to positions which constitute "bona
fide hedging" positions within the meaning and intent of applicable CFTC rules,
or to non-hedging positions for which the aggregate initial margin and premiums
will not exceed 5% of the liquidation value of the Fund's assets.

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The requirements for qualification as a regulated investment company also may
limit the extent to which a Fund may enter into futures contracts, options
thereon or forward contracts. See "Dividends and Tax Status."

Risks Associated with Futures and Options on Futures Contracts. There are
several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variation in
speculative market demand for futures and options on futures, including
technical influences in futures trading and options on futures, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.

Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.

There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or an option on futures position, and that
Fund would remain obligated to meet margin requirements until the position is
closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.

Additional Risks of Options on Securities, Futures Contracts, Options on Futures
Contracts, and Forward Currency Exchange Contracts and Options Thereon. Options
on securities, futures contracts, options on futures contracts, currencies and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees; and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by: (1)
other complex foreign political, legal and economic factors; (2) lesser
availability than in the United States of data on which to make trading
decisions; (3) delays in the Funds' ability to act upon economic events
occurring in foreign markets during non-business hours in the United States; and
(4) lesser trading volume.

FOREIGN SECURITIES

The Funds may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
issuers based in foreign countries. These securities may not necessarily be

B-14
<PAGE> 54

denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European receipts
evidencing a similar arrangement. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and are designed for use in the U.S. securities
markets; EDRs are issued in bearer form, denominated in other currencies, and
are designed for use in European securities markets.

The Fixed-Income Funds may also invest in fixed-income securities of issuers
located in emerging foreign markets. Emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia,
Malaysia, New Zealand, Hong Kong, South Korea, Singapore and most Western
European countries. In determining what countries constitute emerging markets,
the Advisor will consider, among other things, data, analysis and classification
of countries published or disseminated by the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. Currently, investing in many emerging markets
may not be desirable or feasible, because of the lack of adequate custody
arrangements for a Fund's assets, overly burdensome repatriation and similar
restrictions, the lack of organized and liquid securities markets, unacceptable
political risks or other reasons. As opportunities to invest in securities in
emerging markets develop, the Fund expects to expand and further broaden the
group of emerging markets in which it invests.

From time to time, emerging markets have offered the opportunity for higher
returns in exchange for a higher level of risk. Accordingly, the Advisor
believes that a Fixed-Income Fund's ability to invest in emerging markets
throughout the world may enable the achievement of results superior to those
produced by funds, with similar objectives to those of these Funds, that invest
solely in securities in developed markets. There is no assurance that any
Fixed-Income Fund will achieve these results.

The Fixed-Income Funds may invest in the following types of emerging market
fixed-income securities: (1) fixed-income securities issued or guaranteed by
governments, their agencies, instrumentalities or political subdivisions, or by
government owned, controlled or sponsored entities, including central banks
(collectively, "Sovereign Debt"), including Brady Bonds (described below); (2)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt; (3) fixed-income securities issued
by banks and other business entities; and (4) fixed-income securities
denominated in or indexed to the currencies of emerging markets. Fixed-income
securities held by a Fund may take the form of bonds, notes, bills, debentures,
bank debt obligations, short-term paper, loan participations, assignments and
interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of any of the foregoing. There is
no requirement with respect to the maturity of fixed-income securities in which
the Fund may invest.

The Fixed-Income Funds may invest in Brady Bonds and other Sovereign Debt of
countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the "World Bank") and the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.

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Emerging market fixed-income securities generally are considered to be of a
credit quality below investment grade, even though they often are not rated by
any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Advisor's analysis of credit risk and its consideration
of a number of factors, including: prospects for relative economic growth among
the different countries in which the Fixed-Income Funds may invest; expected
levels of inflation; government policies influencing business conditions; the
outlook for currency relationships; and the range of the individual investment
opportunities available to international investors. The Advisor's emerging
market sovereign credit analysis includes an evaluation of the issuing country's
total debt levels, currency reserve levels, net exports/imports, overall
economic growth, level of inflation, currency fluctuation, political and social
climate and payment history. Particular fixed-income securities will be selected
based upon credit risk analysis of potential issuers, the characteristics of the
security and interest rate sensitivity of the various debt issues available with
respect to a particular issuer, analysis of the anticipated volatility and
liquidity of the particular debt instruments, and the tax implications to the
Fund. The emerging market fixed-income securities in which the Fixed-Income
Funds may invest are not subject to any minimum credit quality standards.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

The Funds may take positions in options on foreign currencies to hedge against
the risk of foreign exchange rate fluctuations on foreign securities the Funds
hold in their portfolios or intend to purchase. For example, if a Fund were to
enter into a contract to purchase securities denominated in a foreign currency,
it could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if a Fund held
securities denominated in a foreign currency and anticipated a decline in the
value of that currency against the U.S. dollar, it could hedge against such a
decline by purchasing a put option on the currency involved. The markets in
foreign currency options are relatively new, and a Fund's ability to establish
and close out positions in such options is subject to the maintenance of a
liquid secondary market. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.

The quantities of currencies underlying option contracts represent odd lots in a
market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.

There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations be firm or revised on a timely
basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.

Risks of Options Trading. The Funds may effectively terminate their rights or
obligations under options by entering into closing transactions. Closing
transactions permit a Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. The value of a
foreign currency option depends on the value of the underlying currency relative
to the U.S. dollar. Other factors affecting the value of an option are the time
remaining until expiration, the relationship of the exercise price to market
price, the historical price volatility of the underlying currency and general
market conditions. As a result, changes in the value of an option position may
have no relationship to the investment merit of a foreign security. Whether a
profit or loss is realized on a closing transaction depends on the price
movement of the underlying currency and the market value of the option.

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<PAGE> 56

Options normally have expiration dates of up to nine months. The exercise price
may be below, equal to or above the current market value of the underlying
currency. Options that expire unexercised have no value, and a Fund will realize
a loss of any premium paid and any transaction costs. Closing transactions may
be effected only by negotiating directly with the other party to the option
contract, unless a secondary market for the options develops. Although the Funds
intend to enter into foreign currency options only with dealers which agree to
enter into, and which are expected to be capable of entering into, closing
transactions with the Funds, there can be no assurance that a Fund will be able
to liquidate an option at a favorable price at any time prior to expiration. In
the event of insolvency of the counter-party, a Fund may be unable to liquidate
a foreign currency option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options that it had purchased in order to realize any
profit.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Funds may use forward contracts to protect against uncertainty in the level
of future exchange rates. The Funds will not speculate with forward contracts or
foreign currency exchange rates.

A Fund may enter into forward contracts with respect to specific transactions.
For example, when a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, the Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of the payment, by entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
transaction. A Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.

A Fund also may use forward contracts in connection with portfolio positions to
lock in the U.S. dollar value of those positions, to increase the Fund's
exposure to foreign currencies that the Advisor believes may rise in value
relative to the U.S. dollar or to shift the Fund's exposure to foreign currency
fluctuations from one country to another. For example, when the Advisor believes
that the currency of a particular foreign country may suffer a substantial
decline relative to the U.S. dollar or another currency, it may enter into a
forward contract to sell the amount of the former foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency. This investment practice generally is referred to as
"cross-hedging" when another foreign currency is used.

The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these

B-17
<PAGE> 57

contracts and transaction costs. A Fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains in a segregated account
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, in an amount not less than the
value of the Fund's total assets committed to the consummation of the contracts.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Advisor believes it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.

At or before the maturity date of a forward contract that requires a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.

The cost to the Fund of engaging in forward contracts varies with factors such
as the currencies involved, the length of the contract period and the market
conditions then prevailing. Because forward contracts are usually entered into
on a principal basis, no fees or commissions are involved. The use of forward
contracts does not eliminate fluctuations in the prices of the underlying
securities the Fund owns or intends to acquire, but it does fix a rate of
exchange in advance. In addition, although forward contracts limit the risk of
loss due to a decline in the value of the hedged currencies, at the same time
they limit any potential gain that might result should the value of the
currencies increase.

Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. The Funds may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

Swap Agreements. The Funds may enter into interest rate, index and currency
exchange rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded the desired return. Swap agreements are
two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. The "notional amount" of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. A Fund's obligations (or rights) under
a swap agreement will generally be equal only to the net amount to be paid or
received under the

B-18
<PAGE> 58

agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Fund's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Fund) and any
accrued but unpaid net amounts owed to a swap counter-party will be covered by
the maintenance of a segregated account consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets
marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio. A Fund will not enter into a swap agreement with any single party if
the net amount owed or to be received under existing contracts with that party
would exceed 5% of the Fund's assets.

Whether a Fund's use of swap agreements will be successful in furthering its
investment objective of total return will depend on the Advisor's ability
correctly to predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party. The Advisor will cause a Fund to
enter into swap agreements only with counter-parties that would be eligible for
consideration as repurchase agreement counter-parties. Restrictions imposed by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

Lower-rated or unrated (i.e., high yield) securities are more likely to react to
developments affecting market risk (such as interest rate sensitivity, market
perception of creditworthiness of the issuer and general market liquidity) and
credit risk (such as the issuer's inability to meet its obligations) than are
more highly rated securities, which react primarily to movements in the general
level of interest rates. The Advisor considers both credit risk and market risk
in making investment decisions for the Funds. Investors should carefully
consider the relative risk of investing in high yield securities and understand
that such securities are not generally meant for short-term trading.

The amount of high yield securities outstanding proliferated in the 1980's in
conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower-rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Funds' net asset value.

Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

B-19
<PAGE> 59

ILLIQUID SECURITIES

A Fund may not hold more than 15% of its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, and securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the Unites
States) or legal or contractual restrictions of resale. Historically, illiquid
securities have included securities subject to contractual or legal restrictions
on resale because they have not been registered under the Securities Act,
securities which are otherwise not readily marketable and repurchase agreements
have a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainly in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Also market
quotations are less readily available. The judgment of the Advisor may at times
play a greater role in valuing these securities than in the case of unrestricted
securities. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.

In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities,
convertible securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.

Rule 144A under the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A established a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. The investment adviser anticipates that the market for
certain restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisor will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (1) it much be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSRO"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the Advisor, and
(2) it must not be "traded flat" (i.e., without accrued interest) or in default
as to principal or interest. Investing in Rule 144A securities could have the
effect of

B-20
<PAGE> 60

increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.

MANAGEMENT

The Trustees and officers of the Trust are:

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------- ------------------- ------------------------------------------------------
<S> <C> <C>
Robert L. Burch III (63) Trustee Managing Partner, A.W. Jones Co. (investments);
885 Third Avenue Chairman, Jonathan Mfg. Corp. (slide manufacturing).
New York, NY 10022
John A. G. Gavin (66) Trustee Chairman, Gamma Services Corp. (venture capital)
2100 Century Park West (since 1968); Principal, Gavin, Dailey & Partners
Los Angeles, CA 90067 (consulting) (since 1993); U.S. Ambassador to Mexico
(1981 - 1986); Director, Atlantic Richfield Co.,
Dresser Industries, Inc., Pinkertons, International
Wire Corp. and Kap Resources.
Joe Grills (62) Trustee Member of the Committee of Investment of Employee
11478 Twin Mountains Road Benefit Assets of the Financial Executives Institute
Rapidan, VA 22733 ("CIEBA") (since 1986); member of CIEBA's Executive
Committee since 1988 and its Chairman (1991 - 1992);
Assistant Treasurer of International Business Machines
Incorporated ("IBM") and Chief Investment Officer of
the IBM Retirement Funds (1986 - 1993); Member of the
Investment Advisory Committee of the State of New York
Common Retirement Fund; Director, Duke Management
Company, KIMCO Realty Corp. and LaSalle Street Fund;
Investment Advisory Committee, Howard Hughes Medical
Institute; Trustee or Director of a number of
investment companies for which Merrill Lynch Asset
Management is the advisor.
John F. Hotchkis* (66) Trustee Chairman and Portfolio Manager of the Advisor.
800 West 6th Street
Los Angeles, CA 90017
Robert B. Hutchinson (78) Trustee Former Chairman (1987 - 88) and Director (1976 - 88),
c/o Simpson Investment Prudential Bank (savings bank); Director and former
Co. Senior Vice President, Finance and Secretary, Simpson
1201 3rd Avenue Investment Co. (holding company for a wood products
Seattle, WA 98101 company, pulp and paper company and a PVC products
company); Director, Enterprises International, Inc.
(industrial strapping material manufacturer).
Michael L. Quinn* (51) Trustee Chief Executive Officer of the Advisor (since November
Merrill Lynch Capital 1996); Head of Merrill Lynch Capital Management Group
Management Group (since 1995); co-head of the Equity Division of
800 Scudders Mill Road Merrill Lynch, Pierce, Fenner & Smith Inc.
Plainsboro, NJ 08536 (1991 - 1995); Trustee, Valley Hospital and the
University of Denver.
Merle T. Welshans (79) Trustee Adjunct Professor of Finance, Washington University;
14360 Ladue Road Chairperson of the Investment Committee of the
Chesterfield, MO 63017 Missouri United Methodist Foundation; Trustee,
Deaconess Hospital Foundation.
Richard R. West (59) Trustee Dean Emeritus of New York University's Leonard N.
Box 604 Stern School of Business (since 1993); formerly Dean
Genoa, NV 89411 (1984 - 1993) and Professor of Finance (1984 - 1995),
New York University's Leonard N. Stern School of
Business; Director, Bornado, Inc., Alexander's Inc.,
Bowne & Co., Inc. and Smith Corona Corp.; Trustee or
Director of a number of investment companies for which
Merrill Lynch Asset Management is the advisor.
</TABLE>

B-21
<PAGE> 61

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------- ------------------- ------------------------------------------------------
<S> <C> <C>
Nancy D. Celick (46) President and Chief Financial Officer and Director of the Advisor;
800 West 6th Street Principal Executive Chief Financial Officer Kennedy-Wilson, Inc. (auction
Los Angeles, CA 90017 Officer marketing services) (1992 - 1993); Chief Financial
Officer of First National Corporation (bank holding
company) (1984 - 1992).
Gail Bardin (51) Executive Vice Managing Director of the Advisor since 1995; Partner
800 West 6th Street President of the Advisor (1994 - 1995); Principal of the Advisor
Los Angeles, CA 90017 (1992 - 1994); Portfolio Manager of the Advisor
(1988 - 1992).
Mark D. Cone (29) Vice President Vice President of the Advisor; Retail Account Manager,
800 West 6th Street Neuberger & Berman (1991 - 1994).
Los Angeles, CA 90017
Gracie Fermelia (36) Secretary, Vice President of the Advisor; Senior Manager, Price
800 West 6th Street Treasurer, and Waterhouse (1985 - 1994).
Los Angeles, CA 90017 Principal Financial
and Accounting
Officer
</TABLE>

- ---------------

* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Advisor.

The Trust does not pay salaries to any of its officers or fees to any of its
Trustees affiliated with the Advisor. The following table sets forth the
estimated aggregate compensation to be paid to the Trustees during the Trust's
fiscal year ending December 31, 1998 and the aggregate compensation paid to the
Trustees for service on the Trust's Board and that of any other fund for which
the Advisor serves as investment adviser or has an investment adviser that is an
affiliated person of the Advisor ("Fund Complex") for the calendar year ended
December 31, 1997.

<TABLE>
<CAPTION>
TOTAL 1997
COMPENSATION
PENSION OR FROM TRUST
RETIREMENT ESTIMATED ANNUAL AND FUND
AGGREGATE BENEFITS ACCRUED BENEFITS COMPLEX PAID
COMPENSATION AS PART OF FUND UPON TO TRUSTEES
NAME AND POSITION FROM TRUST EXPENSES RETIREMENT *
- -------------------------------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Robert L. Burch III, $ 12,000 none n/a $ 10,500
Trustee
John A. G. Gavin, $ 12,000 none n/a $ 6,000
Trustee
Joe Grills, $ 12,000 none n/a $171,500
Trustee
John F. Hotchkis, $ -0- none n/a $ -0-
Trustee
Robert B. Hutchinson, $ 12,000 none n/a $ 12,000
Trustee
Michael L. Quinn, $ -0- none n/a $ -0-
Trustee
Merle T. Welshans, $ 12,000 none n/a $ 12,000
Trustee
Richard R. West, $ 12,000 none n/a $299,000
Trustee
</TABLE>

- ---------------

* Each Trustee also serves as a Trustee of the Hotchkis and Wiley Funds. Messrs.
Grills and West also serve on the boards of other investment companies advised
by Merrill Lynch Asset Management, LP and its advisory affiliates (Mr. Grills
serves 20 registered investment companies representing 48 portfolios and Mr.
West serves 48 registered investment companies representing 70 portfolios).

B-22
<PAGE> 62

THE ADVISOR

The Advisor provides the Funds with management and investment advisory services.
Hotchkis and Wiley is a division of the Merrill Lynch Capital Management Group
of Merrill Lynch Asset Management, L.P., located at 800 West 6th Street, Los
Angeles, California 90017 and a separate business unit of Merrill Lynch & Co.,
Inc., a financial services holding company incorporated in Delaware.

The Equity Income and International VIP Portfolios pay the Advisor for the
services performed a fee at the annual rate of 0.75% of each Fund's average net
assets. The Total Return Bond VIP Portfolio pays the Advisor a fee at the annual
rate of 0.55% of its average daily net assets. The Low Duration VIP Portfolio
pays the Advisor a fee at the annual rate of 0.46% of its average daily net
assets.

In addition, the Advisor has voluntarily agreed to limit the annual operating
expenses of the Equity Income VIP Portfolio to 1.15% of the Fund's average net
assets. The Advisor has agreed to limit the annual operating expenses of the
International VIP Portfolio to 1.35% of the Fund's average net assets. The
Advisor has agreed to limit the annual operating expenses of the Total Return
Bond VIP Portfolio to 0.65% of the Fund's average net assets. Additionally, the
Advisor has agreed to limit the annual operating expenses of the Low Duration
VIP Portfolio to 0.58% of the Fund's average net assets.

Each of the four Investment Advisory Agreements provides that the Advisor shall
not be liable to the Trust for any error of judgment by the Advisor or for any
loss sustained by any of the Funds except in the case of a breach of fiduciary
duty with respect to the receipt of compensation for services (in which case any
award of damages will be limited as provided in the 1940 Act) or of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.

THE DISTRIBUTOR

Merrill Lynch Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Investment Advisory Agreements state that in connection with its duties to
arrange for the purchase and the sale of securities held in the portfolio of
each Fund by placing purchase and sale orders for that Fund, the Advisor shall
select such broker-dealers ("brokers") as shall, in the Advisor's judgment,
implement the policy of the Trust to achieve "best execution", i.e., prompt and
efficient execution at the most favorable securities price. In making such
selection, the Advisor is authorized in the Agreements to consider the
reliability, integrity and financial condition of the broker. The Advisor is
also authorized by the Agreements to consider whether the broker provides
brokerage and/or research services to the Fund and/or other accounts of the
Advisor. The Agreements state that the commissions paid to brokers may be higher
than another broker would have charged if a good faith determination is made by
the Advisor that the commission is reasonable in relation to the services
provided, viewed in terms of either that particular transaction or the Advisor's
overall responsibilities as to the accounts as to which it exercises investment
discretion and that the Advisor shall use its judgment in determining that the
amount of commissions paid are reasonable in relation to the value of brokerage
and research services provided and need not place or attempt to place a specific
dollar value on such services or on the portion of commission rates reflecting
such services. The Agreements provide that to demonstrate that such
determinations were in good faith, and to show the overall reasonableness of
commissions paid, the Advisor shall be prepared to show that commissions paid
(1) were

B-23
<PAGE> 63

for purposes contemplated by the Agreements; (2) were for products or services
which provide lawful and appropriate assistance to the Advisor's decision-making
process; and (3) were within a reasonable range as compared to the rates charged
by brokers to other institutional investors as such rates may become known from
available information. The Advisor is also authorized to consider sales of
shares of each Fund and/or of any other investment companies for which the
Advisor acts as Advisor as a factor in the selection of brokers to execute
brokerage and principal transactions, subject to the requirements of "best
execution", as defined above, although the Advisor is not currently doing so.

The research services discussed above may be in written form or through direct
contact with individuals and may include information as to particular companies
and securities as well as market, economic or institutional areas and
information assisting the Trust in the valuation of the Funds' investments. The
research which the Advisor receives for the Funds' brokerage commissions,
whether or not useful to a Fund, may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.

In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission although the price of the security usually includes a profit to the
dealer. Money market instruments usually trade on a "net" basis as well. On
occasion, certain money market instruments may be purchased by the Funds
directly from an issuer in which case no commissions or discounts are paid. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.

The International VIP Portfolio anticipates that its brokerage transactions
involving securities of companies headquartered in countries other than the U.S.
will be conducted primarily on the principal exchanges of such countries.
Transactions on foreign exchanges are usually subject to fixed commissions which
are generally higher than negotiated commissions on U.S. transactions, although
the Trust will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the U.S.

NET ASSET VALUE

As indicated in the Funds' Prospectus, the net asset value per share of each
Fund's shares will be determined on each day that the New York Stock Exchange is
open for trading. That Exchange annually announces the days on which it will not
be open for trading; the most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King, Jr. Holiday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, that Exchange may close on days not
included in that announcement. Also, no Fund is required to compute its net
asset value on any day on which no order to purchase or redeem its shares is
received.

Securities are valued by an independent pricing agent to the extent possible. In
determining the net asset value of each Fund's shares, equity securities that
are listed on a securities exchange (whether domestic or foreign) or quoted by
the NASDAQ National Market System are valued at the last sale price on that day
as of the close of regular trading on the New York Stock Exchange (which is
currently 4:00 p.m., New York time), or, in the absence of recorded sales, at
the average of readily available closing bid and asked prices on such exchange
or on such System. Unlisted equity securities that are not included in such
National Market System are valued at the average of the quoted bid and asked
prices in the over-the-counter market.

B-24
<PAGE> 64

Fixed-income securities which are traded on a national securities exchange will
be valued at the last sale price or, if there was no sale on such day, at the
average of readily available closing bid and asked prices on such exchange.
However, securities with a demand feature exercisable within one to seven days
are valued at par. Prices for fixed-income securities may be based on quotations
received from one or more market-makers in the securities, or on evaluations
from pricing services. Fixed-income securities for which quotations or prices
are not readily available are valued at their fair value as determined by the
Advisor under guidelines established by the Board of Trustees, with reference to
fixed-income securities whose prices are more readily obtainable or to an
appropriate matrix utilizing similar factors. As a broader market does not
exist, the proceeds received upon the disposal of such securities may differ
from their recorded value. Debt securities which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less or by amortizing the value as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days.

Options, futures contracts and options thereon which are traded on exchanges are
valued at their last sale or settlement price as of the close of the exchanges
or, if no sales are reported, at the average of the quoted bid and asked prices
as of the close of the exchange.

Trading in securities listed on foreign securities exchanges or over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange. In addition, foreign securities trading may not take place
on all business days in New York and may occur on days on which the New York
Stock Exchange is not open. In addition, foreign currency exchange rates are
generally determined prior to the close of trading on the New York Stock
Exchange. Events affecting the values of foreign securities and currencies will
not be reflected in the determination of net asset value unless the Board of
Trustees determines that the particular event would materially affect net asset
value, in which case an adjustment will be made. Investments quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time of valuation. Foreign currency exchange
transactions conducted on a spot basis are valued at the spot rate prevailing in
the foreign exchange market.

Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.

DIVIDENDS AND TAX STATUS

Each Fund intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code").
Qualification as a regulated investment company requires, among other things,
that (1) at least 90% of each Fund's annual gross income, without offset for
losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of securities, foreign currencies or options
(including forward contracts) thereon; and (2) each Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities). In addition, in order not to be subject to federal taxation, each
Fund must distribute to its shareholders at least 90% of its net investment
income, other than net capital gains, earned in each year.

B-25
<PAGE> 65

A separate account upon which a variable annuity contract or variable life
insurance contract is based must meet certain diversification requirements set
forth in the Code and U.S. Treasury regulations. The Code provides a safe harbor
provision under which a separate account will be treated as satisfying the
diversification requirements if, as of the close of each quarter, the assets in
the account meet the diversification requirements for a regulated investment
company and no more than 55% of those assets consist of cash, cash items, U.S.
government securities and securities of other regulated investment companies.
The U.S. Treasury regulations provide an alternative to the safe harbor
provision of the Code. Under such regulations, a separate account will satisfy
the diversification requirements if, among other things, the regulated
investment company underlying such account invests no more than (1) 55% of the
value of its assets in one investment, (2) 70% of the value of its assets in two
investments, (3) 80% of the value of its assets in three investments, and (4)
90% of the value of its assets in four investments. If, as is intended, each
Fund meets these requirements and complies with certain other conditions, a
separate account investing solely in shares of a Fund will also be deemed to
meet these diversification requirements. However, a failure of a Fund to qualify
as a regulated investment company or to meet such conditions and to comply with
such requirements could cause the owners of variable annuity contracts and
variable life insurance contracts based on such accounts to recognize ordinary
income each year in the amount of any net appreciation of such contract during
the year (including the annual costs of life insurance, if any, provided under
such contract).

Provided that each Fund and a separate account investing in such Fund satisfy
the above requirements, any distributions from a Fund will be exempt from
current federal income taxation to the extent that such distributions accumulate
in a variable annuity contract or variable life insurance contract owned by an
individual.

A Fund is required to pay an excise tax to the extent it does not distribute to
its shareholders during such calendar year at least 98% of its ordinary income
for that calendar year, 98% of its capital gains over capital losses for the
one-year period ending October 31 in such calendar year, and all undistributed
ordinary income and capital gains for the preceding respective one-year period.
The Funds intend to meet these distribution requirements to avoid excise tax
liability.

In determining the extent to which a Fund's dividends may be eligible for the
70% dividends received deduction applicable to corporations, including insurance
companies, interest income, capital gain net income, gain or loss from Section
1256 contracts, dividend income from foreign corporations and income from other
sources will not constitute qualified dividends. Shareholders should consult
their tax advisors regarding other requirements applicable to the dividends
received deduction.

Special rules apply to the treatment of certain forward foreign currency
exchange contracts (Section 1256 contracts). At the end of each year, such
investments held by a Fund must be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Except to the
extent that such gains or losses are treated as "Section 988" gains or losses,
as described below, sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.

Under the Internal Revenue Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or loss. Similarly, gains or losses
on forward foreign currency exchange contracts or dispositions of debt
securities denominated in a foreign currency attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition are also treated as ordinary gain or loss.

B-26
<PAGE> 66

These gains, referred to as "Section 988" gains or losses, increase or decrease
the amount of a Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing the basis of each
shareholder's shares.

PERFORMANCE INFORMATION

Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:

P(1+T)(n) = ERV

where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication. Average annual total
return, or "T" in the above formula, is computed by finding the average annual
compounded rates of return over the period that would equate the initial amount
invested to the ending redeemable value. Average annual total return assumes the
reinvestment of all dividends and distributions.

Yield. Annualized yield quotations used in a Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:

<TABLE>
<S> <C>
YIELD = 2 [ ( a-b + 1)(6) - 1 ]
cd
</TABLE>

where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.

Except as noted below, in determining net investment income earned during the
period ("a" in the above formula), a Fund calculates interest earned on each
debt obligation held by it during the period by: (1) computing the obligation's
yield to maturity, based on the market value of the obligation (including actual
accrued interest) on the last business day of the period or, if the obligation
was purchased during the period, the purchase price plus accrued interest; (2)
dividing the yield to maturity by 360 and multiplying the resulting quotient by
the market value of the obligation (including actual accrued interest). Once
interest earned is calculated in this fashion for each debt obligation held by
the Fund, net investment income is then determined by totaling all such interest
earned.

For purposes of these calculations, the maturity of an obligation with one or
more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.

B-27
<PAGE> 67

Other information. Each Fund's performance data quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in a
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. Yields and total returns quoted for a Fund
include the effect of deducting the Fund's expenses, but may not include charges
and expenses attributable to a particular variable annuity contract or variable
life insurance policy. Including these charges in the quotations of a Fund's
yield and total return would have the effect of decreasing performance. Since
shares of the Funds can be purchased only through a variable annuity contract or
variable life insurance policy, a purchaser of such contract or policy should
carefully review the prospectus for the applicable variable annuity contract or
variable life insurance policy for information on relevant charges and expenses.
Performance information for the Funds must always be accompanied by, and be
reviewed with, performance information for the insurance product which invests
in the Funds.

In advertising and promotional materials, a Fund may compare its performance
with data published by Lipper Analytical Services, Inc. ("Lipper") or CDA
Investment Technologies, Inc. ("CDA"). The Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper or CDA. Advertising and promotional
materials also may refer to discussions of the Fund and comparative mutual fund
data and ratings reported in independent periodicals including, but not limited
to, The Wall Street Journal, Money Magazine, Forbes, Business Week, Financial
World and Barron's.

GENERAL INFORMATION ABOUT THE TRUST

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in each Fund. Each share represents an
interest in a Fund proportionately equal to the interest of each other share.
Upon the Trust's liquidation, all shareholders would share pro rata in the net
assets of the Fund in question available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create classes of shares. The Board of Trustees has created four
series of shares, and may create additional series in the future, which have
separate assets and liabilities; each of such series has or will have a
designation including the word "Series." Income and operating expenses not
specifically attributable to a particular Fund are allocated fairly among the
Funds by the Trustees, generally on the basis of the relative net assets of each
Fund.

The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.

Ten shareholders holding the lesser of $25,000 worth or one percent of a Fund's
shares may advise the Trustees in writing that they wish to communicate with
other shareholders for the purpose of requesting a meeting to remove a Trustee.
The Trustees will then, if requested by the applicants, mail at the applicants'
expense the applicants' communication to all other shareholders.

B-28
<PAGE> 68

The Trust or any Fund may be terminated if approved by the vote of a majority of
the Trustees or by the approval of the holders of a majority of the Trust's
outstanding shares, as defined in the 1940 Act. If not so terminated, the Trust
will continue indefinitely.

Rule 18f-2 under the 1940 Act provides that as to any investment company which
has two or more series outstanding and as to any matter required to be submitted
to shareholder vote, such matter is not deemed to have been effectively acted
upon unless approved by the holders of a "majority" (as defined in the Rule) of
the voting securities of each series affected by the matter. Such separate
voting requirements do not apply to the election of Trustees or the ratification
of the selection of accountants. A change in investment policy may go into
effect as to one or more series whose holders so approve the change even though
the required vote is not obtained as to the holders of other affected series.

The rights accompanying Fund shares are legally vested in the separate accounts.
However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the separate accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in separate accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
separate account prospectus.

The Trust's custodian, Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Funds' assets and acts as
the Trust's accounting services agent. The Chase Manhattan Bank, N.A., through
its global custody network, provides custodial services for assets of the Trust
held outside the U.S. The Trust's independent accountants, Price Waterhouse LLP,
100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, examine the Trust's
financial statements and assist in the preparation of certain reports to the
Securities and Exchange Commission.

As of the date of this Statement of Additional Information, the Advisor owns all
of the outstanding shares of the Funds.

B-29
<PAGE> 69

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Trustees of

Hotchkis and Wiley Variable Trust

In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of each of the
portfolios of Hotchkis and Wiley Variable Trust (the "Funds") at January 16,
1998, in conformity with generally accepted accounting principles. This
financial statement is the responsibility of the Funds' management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP

Milwaukee, Wisconsin

January 26, 1998

B-30
<PAGE> 70

HOTCHKIS AND WILEY VARIABLE TRUST

STATEMENT OF ASSETS AND LIABILITIES

JANUARY 16, 1998

<TABLE>
<CAPTION>
LOW TOTAL RETURN
EQUITY INCOME DURATION BOND INTERNATIONAL
VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash........................................... $49,990 $49,990 $ 10 $ 10
Unamortized organization costs................. 14,250 14,250 14,250 14,250
-------- ------- ------- -------
Total Assets......................... 64,240 64,240 14,260 14,260
-------- ------- ------- -------
LIABILITIES
Payable to advisor............................. 14,250 14,250 14,250 14,250
-------- ------- ------- -------
Total Liabilities.................... 14,250 14,250 14,250 14,250
-------- ------- ------- -------
NET ASSETS..................................... $49,990 $49,990 $ 10 $ 10
======== ======= ======= =======
Capital shares, no par value; unlimited shares
of beneficial interest authorized............ 4,999 4,999 1 1
-------- ------- ------- -------
Net asset value, offering and redemption price
per share (net assets/shares of beneficial
interest outstanding)........................ $ 10.00 $ 10.00 $ 10.00 $ 10.00
======== ======= ======= =======
</TABLE>

The accompanying notes to the financial statement

are an integral part of this statement.

B-31
<PAGE> 71

HOTCHKIS AND WILEY VARIABLE TRUST

NOTES TO THE FINANCIAL STATEMENT

JANUARY 16, 1998

1. ORGANIZATION

Hotchkis and Wiley Variable Trust (the "Trust") was organized as a Massachusetts
business trust on February 4, 1997 and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company issuing its shares in series, each series representing a
distinct portfolio with its own investment objective and policies. The series
presently authorized are the Total Return Bond VIP Portfolio, Low Duration VIP
Portfolio, Equity Income VIP Portfolio and International VIP Portfolio
(collectively, the "Funds"). Each Fund is a diversified series of shares, each
having separate assets and liabilities, of the Trust. Shares of the Funds are
not offered to the general public but may only be purchased by the separate
accounts of participating insurance companies for the purpose of funding
variable annuity contracts and/or variable life insurance contracts.

The Funds have had no operations other than those relating to organizational
matters, including the sale of 4,999 shares for cash in the amount of $49,990
for each of the Equity Income VIP Portfolio and Low Duration VIP Portfolio and
one share for cash in the amount of $10 for each of the Total Return Bond VIP
Portfolio and International VIP Portfolio, which were sold to Hotchkis and Wiley
(the "Advisor") on January 16, 1998. The Advisor is a division of the Merrill
Lynch Capital Management Group of Merrill Lynch Asset Management, L.P. and a
separate business unit of Merrill Lynch & Co.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Organization Costs

Costs incurred by the Trust in connection with the organization, registration
and the initial public offering of shares, are being deferred and amortized over
the period of benefit, but not to exceed sixty months from the Trust's
commencement of operations. These costs were advanced by the Advisor and will be
reimbursed by the Trust. The proceeds of any redemption of the initial shares by
the original shareholder will be reduced by a pro-rata portion of any then
unamortized organizational expenses in the same proportion as the number of
initial shares being redeemed bears to the number of initial shares outstanding
at the time of such redemption.

(b) Federal Income Taxes

Each Fund intends to comply with the requirements of the Internal Revenue Code
necessary to qualify as a regulated investment company and to make the requisite
distributions of income and capital gains to their shareholders sufficient to
relieve it from all or substantially all Federal income taxes.

3. INVESTMENT ADVISOR

The Trust has an agreement with the Advisor, with whom certain officers and
Trustees of the Trust are affiliated, to furnish investment advisory services to
the Funds. Under the terms of this agreement, the Advisor will receive the
following percentage of average daily net assets for each Fund: 0.55% for the
Total Return Bond VIP Portfolio, 0.46% for the Low Duration VIP Portfolio, and
0.75% for each of the Equity Income VIP Portfolio and International VIP
Portfolio.

B-32
<PAGE> 72

HOTCHKIS AND WILEY VARIABLE TRUST

NOTES TO THE FINANCIAL STATEMENT (CONTINUED)

JANUARY 16, 1998

The Advisor has agreed to reimburse expenses of the Funds to the extent
necessary to ensure that the regular annual operating expenses of the Funds do
not exceed the following percentage of average daily net assets for each Fund:
0.65% for the Total Return Bond VIP Portfolio, 0.58% for the Low Duration VIP
Portfolio, 1.15% for the Equity Income VIP Portfolio and 1.35% for the
International VIP Portfolio.

B-33
<PAGE> 73
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements:

The following audited financial statements are included in the
Statement of Additional Information constituting Part B of this Registration
Statement:

Statement of Assets and Liabilities
Notes to Financial Statements
Report of Independent Accountants

The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:

None.

(b) Exhibits:

(1) (a) Declaration of Trust(1)
(b) Amended Certificate of Designation(2)
(2) By-Laws(1)
(3) Not applicable
(4) Not applicable
(5) (a) Form of Investment Advisory Agreement
relating to the Equity Income VIP
Portfolio(2)
(b) Form of Investment Advisory Agreement
relating to the International VIP
Portfolio(2)
(c) Form of Investment Advisory Agreement
relating to the Low Duration VIP
Portfolio(2)
(d) Form of Investment Advisory Agreement
relating to the Total Return Bond
VIP Portfolio(2)
(6) Distribution Agreement*
(7) Not applicable
(8) (a) Custodian Agreement with Firstar Trust Company*
(b) Global Custody Tri-Party Agreement between
Firstar Trust Company and Chase Manhattan Bank,
N.A.*
(9) (a) Fund Administration Servicing Agreement*
(b) Transfer Agent Agreement*
(10) Opinion and Consent of Counsel*
(11) Consent of Independent Accountants*
(12) Not applicable
(13) Subscription Agreement*
(14) Not applicable
(15) Not applicable
(16) Not applicable

- ----------

* Filed herewith.
(1) Incorporated by reference to the Registration Statement on
Form N-1A filed on April 1, 1997 (File No. 333-24349).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 21, 1997.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

See "General Information About the Trust" in the Statement of
Additional Information.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of January 19, 1998, Hotchkis and Wiley, a division of the
Merrill Lynch Capital Management Group of Merrill Lynch Asset
Management, L.P., owned all of the outstanding shares of Hotchkis
& Wiley Variable Trust.

C-1
<PAGE> 74
ITEM 27. INDEMNIFICATION.

Section 12 of Article SEVENTH of Registrant's Declaration of Trust,
states as follows:

(i) the term "indemnitee" shall mean any present or
former Trustee, officer or employer of the Trust, any present
or former Trustee or officer of another trust or corporation
whose securities are or were owned by the Trust or of which
the Trust is or was a creditor and who served or serves in
such capacity at the request of the Trust, any present or
former investment advisor, sub-advisor or principal
underwriter of the Trust and the heirs, executors,
administrators, successors and assigns of any of the
foregoing; however, whenever conduct by an indemnitee is
referred to, the conduct shall be that of the original
indemnitee rather than that of the heir, executor,
administrator, successor or assignee;

(ii) the term "covered proceeding" shall mean any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to
which an indemnitee is or was a party or is threatened to be
made a party by reason of the fact or facts under which he or
it is an indemnitee as defined above;

(iii) the term "disabling conduct" shall mean willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office in
question;

(iv) the term "covered expenses" shall mean expenses
(including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by an
indemnitee in connection with a covered proceeding; and

(v) the term "adjudication of liability" shall mean,
as to any covered proceeding and as to any indemnitee, an
adverse determination as to the indemnitee whether by judgment
order, settlement, conviction or upon a plea of nolo
contendere or its equivalent.

(d) The Trust shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an
adjudication of liability against such indemnitee expressly based on a
finding of disabling conduct.

(e) Except as set forth in (d) above, the Trust shall
indemnify an indemnitee for covered expenses in any covered proceeding,
whether or not there is an adjudication of liability as to such
indemnitee, if a determination has been made that the indemnitee was
not liable by reason of disabling conduct by (i) a final decision of
the court or other body before which the covered proceeding was
brought; or (ii) in the absence of such decision, a reasonable
determination, based on a review of the facts, by either (a) the vote
of a majority of a quorum of Trustees who are neither "interested
persons," as defined in the 1940 Act, nor parties to the covered
proceeding or (b) an independent legal counsel in a written opinion;
provided that such Trustees or counsel, in reaching such determination,
may but need not presume the absence of disabling conduct on the part
of the indemnitee by reason of the manner in which the covered
proceeding was terminated.

(f) Covered expenses incurred by an indemnitee in connection
with a covered proceeding shall be advanced by the Trust to an
indemnitee prior to the final disposition of a covered proceeding upon
the request of the indemnitee for such advance and the undertaking by
or on behalf of the indemnitee to repay the advance unless it is
ultimately determined that the indemnitee is entitled to
indemnification thereunder, but only if one or more of the following is
the case: (i) the indemnitee shall provide a security for such
undertaking; (ii) the Trust shall be insured against losses arising out
of any lawful advances; or (iii) there shall have been a determination,
based on a review of the readily available facts (as, opposed to a full
trial-type inquiry) that there is a reason to believe that the
indemnitee ultimately will be found entitled to indemnification by
either independent legal counsel in a written opinion or by the vote of
a majority of a

C-2
<PAGE> 75
quorum of trustees who are neither "interested persons" as defined in
the 1940 Act nor parties to the covered proceeding.

(g) Nothing herein shall be deemed to affect the right of the
Trust and/or any indemnitee to acquire and pay for any insurance
covering any or all indemnitees to the extent permitted by the 1940 Act
or to affect any other indemnification rights to which any indemnitee
may be entitled to the extent permitted by the 1940 Act.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See "Organization and Management" in the Prospectus constituting Part A
of this Registration Statement and "Management" in the Statement of Additional
Information constituting Part B of this Registration Statement. Information as
to Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P., is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-11583), as most recently amended, the text of which is incorporated
herein by reference.

ITEM 29. PRINCIPAL UNDERWRITERS.

Not applicable.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Registrant and
Registrant's custodian, as follows: the documents required to be maintained by
paragraphs (4), (5), (6), (7), (10) and (11) of Rule 31a-1(b) will be maintained
by the Registrant, and all other records will be maintained by the Custodian.

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

The Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of this Registration Statement.

The Registrant hereby undertakes to furnish to each person to whom a
Prospectus is delivered a copy of Registrant's latest annual report to
shareholders upon request and without charge.

C-3
<PAGE> 76
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Los Angeles and State of California on
the 27th day of January, 1998.

HOTCHKIS AND WILEY VARIABLE TRUST

By: /s/ Nancy D. Celick
------------------------------------
Nancy D. Celick
President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy D. Celick Principal Executive Officer January 27, 1998
- ------------------------------------
Nancy D. Celick

/s/ Gracie Fermelia Principal Financial and Accounting January 27, 1998
- ------------------------------------
Gracie Fermelia Officer

/s/ Robert L. Burch III Trustee January 27, 1998
- ------------------------------------
Robert L. Burch III

/s/ John Gavin Trustee January 27, 1998
- ------------------------------------
John Gavin

/s/ Joe Grills Trustee January 27, 1998
- ------------------------------------
Joe Grills

/s/ John F. Hotchkis Trustee January 27, 1998
- ------------------------------------
John F. Hotchkis

Trustee
- ------------------------------------
Robert B. Hutchinson

/s/ Michael L. Quinn Trustee January 27, 1998
- ------------------------------------
Michael L. Quinn

/s/ Merle T. Welshans Trustee January 27, 1998
- ------------------------------------
Merle T. Welshans

/s/ Richard R. West Trustee January 27, 1998
- ------------------------------------
Richard R. West
</TABLE>

<PAGE> 77

EXHIBIT INDEX

Exhibit No. Exhibit
- ----------- -------

1(a) Declaration of Trust(1)

1(b) Amended Certificate of Designation(2)

2 By-Laws(1)

3 Not Applicable

4 Not Applicable

5(a) Form of Investment Advisory Agreement relating to
the Equity Income VIP Portfolio(2)

5(b) Form of Investment Advisory Agreement relating to
the International VIP Portfolio(2)

5(c) Form of Investment Advisory Agreement relating to
the Low Duration VIP Portfolio(2)

5(d) Form of Investment Advisory Agreement relating to
the Total Return Bond VIP Portfolio(2)

6 Distribution Agreement*

7 Not Applicable

8(a) Custodian Agreement with Firstar Trust Company*

8(b) Global Custody Tri-Party Agreement between Firstar Trust
Company and Chase Manhattan Bank, N.A.*

9(a) Fund Administration Servicing Agreement*

9(b) Transfer Agent Agreement*

10 Opinion and Consent of Counsel*

11 Consent of Independent Accountants*

12 Not Applicable

13 Subscription Agreement*

14 Not Applicable

15 Not Applicable

16 Not Applicable

- -----------------------

* Filed herewith.
(1) Incorporated by reference to the Registration Statement on Form N-1A
filed on April 1, 1997 (File No. 333-24349).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 21, 1997.

<PAGE> 1
EXHIBIT 99.B6

DISTRIBUTION AGREEMENT

AGREEMENT made as of the 1st day of February, 1998 between HOTCHKIS AND
WILEY VARIABLE TRUST, a Massachusetts business trust (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").

W I T N E S S E T H:

WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended to date (the "Investment Company Act"), as an open-end
investment company and it is affirmatively in the interest of the Fund to offer
its shares for sale continuously; and

WHEREAS, the Fund currently is comprised of four separate portfolios,
namely, the Equity Income VIP Portfolio, the International VIP Portfolio, the
Total Return Bond VIP Portfolio and the Low Duration VIP Portfolio (each a
"Series"), each of which pursues its own investment objective through separate
investment policies; and

WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and

WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of shares of each Series
(collectively, the "Shares") in order to promote the growth of the Series and
facilitate the distribution of Shares.

NOW, THEREFORE, the parties agree as follows:

Section 1. Appointment of the Distributor. The Fund hereby appoints the
Distributor as the principal underwriter and distributor of the Fund to sell
Shares to the public and hereby agrees during the term of this Agreement to sell
Shares of the Fund to the Distributor upon the terms and conditions herein set
forth.

<PAGE> 2

Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of its Shares, except that:

(a) The exclusive rights granted to the Distributor to purchase
Shares from the Fund shall not apply to shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.

(b) Such exclusive rights also shall not apply to Shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.

(c) Such exclusive rights also shall not apply to Shares issued
by the Fund pursuant to any exchange or reinstatement privilege afforded
redeeming shareholders or to any other Shares as shall be agreed between the
Fund and the Distributor from time to time.

Section 3. Purchase of Shares from the Fund.

(a) The Distributor shall have the rights to buy from the Fund
the Shares needed, but not more than the Shares needed (except for clerical
errors in transmission), to fill unconditional orders for Shares of the Fund
placed with the Distributor by investors or securities dealers. Investors
eligible to purchase Shares shall be those persons so identified in the
currently effective prospectus and statement of additional information of the
Fund under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the Shares. The price which the Distributor shall pay for Shares so
purchased from the Fund shall be the net asset value, determined as set forth in
Section 3(c) hereof.

2
<PAGE> 3
(b) The Shares are to be resold by the Distributor to investors
at net asset value, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.

(c) The net asset value of Shares of a Series shall be determined
by the Fund or any agent of the Fund in accordance with the method set forth in
the prospectus and/or statement of additional information of the Fund and
guidelines established by the Board of Trustees.

(d) The Fund shall have the right to suspend the sale of its
Shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by federal or New
York authorities, or if there shall have been some other event, which, in the
judgment of the Fund, makes it impracticable or inadvisable to sell the Shares.

(e) The Fund, or any agent of the Fund designated in writing by
the Fund, shall be promptly advised of all purchase orders for Shares received
by the Distributor. Any order may be rejected by the Fund; provided, however,
that the Fund will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds.
The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).

3
<PAGE> 4
Section 4. Repurchase or Redemption of Shares by the Fund.

(a) Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so tendered
in accordance with its obligations as set forth in Article FOURTH, paragraph 6
of its Restated Declaration of Trust, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be paid to redeem
or repurchase the Shares shall be equal to the net asset value for that Series
calculated in accordance with the provisions of Section 3(c) hereof. All
payments by the Fund hereunder shall be made in the manner set forth below.

The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and statement of
additional information.

(b) Redemption of Shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said exchange is
closed, when trading on said Exchange is restricted, when an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.

4
<PAGE> 5

Section 5. Duties of the Fund.

(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor such number of
copies of its prospectus and statement of additional information as the
Distributor shall reasonably request.

(b) The Fund shall such steps as may be necessary to register the
Shares under the Securities Act to the end that there will be available for sale
such number of Shares as the Distributor reasonably may be expected to sell.

(c) The Fund shall use its best efforts to file notices and
maintain the notification regarding an appropriate number of its Shares for sale
under the securities laws of such states as the Distributor and the Fund may
approve. Any such notification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 8(c) hereof, the
expense of notices and maintenance of notification shall be borne by the Fund.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such notification.

(d) The Fund will furnish, in reasonable quantities upon request
by the Distributor, copies of annual and interim reports of the Fund.

Section 6. Duties of the Distributor.

(a) The Distributor shall devote reasonable time and effort to
effect sales of Shares of the Fund, but shall not be obligated to sell any
specific number of Shares. The services of the Distributor to the Fund hereunder
are not to be deemed exclusive and nothing herein

5
<PAGE> 6

contained shall prevent the Distributor from entering into like arrangements
with other investment companies so long as the performance of its obligations
hereunder is not impaired thereby.

(b) In selling the Shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer nor any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the registration statement or related prospectus and statement of
additional information and any sales literature specifically approved by the
Fund.

(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of sales to investors
and selected dealers, the collection of amounts payable by investors and
selected dealers on such sales, and the cancellation of unsettled transactions,
as may be necessary to comply with the requirements of the National Association
of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.

Section 7. Selected Dealer Agreements.

(a) The Distributor shall have the right to enter into selected
dealer agreements with securities dealers of its choice ("selected dealers") for
the sale of Shares; provided that the Fund shall approve the forms of agreements
with dealers. Shares sold to selected dealers shall be for resale by such
dealers only at net asset value determined as set forth in Section 3(c) hereof.
The form of agreement with selected dealers to be used in the offering of the
Shares is attached hereto as Exhibit A.

(b) The Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD.

6
<PAGE> 7

Section 8. Payment of Expenses.

(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in connection with
the preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).

(b) The Distributor shall be responsible for any payments which
it agrees to make to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial consultants or other
persons directly involved in selling Shares. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof which are to be
used in connection with the offering of Shares to selected dealers or investors
pursuant to this Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Shares for sale to the public and any expenses of
advertising incurred by the Distributor in connection with such offering.

(c) Each Series shall bear the cost and expenses of filing
notices relating to the Shares of such Series for sale pursuant to this
Agreement, and, if necessary or advisable in connection therewith, of qualifying
the Fund as a broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor pursuant to

7
<PAGE> 8

Section 5(c) hereof and the cost and expenses payable to each such state for
continuing notification or qualification therein until the Fund decides to
discontinue such notification or qualification pursuant to Section 5(c) hereof.

Section 9. Indemnification.

(a) The Fund shall indemnify and hold harmless the Distributor
and each person, if any, who controls the Distributor against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect the Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling

8
<PAGE> 9

persons, unless the Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons
(or after the Distributor or such controlling persons shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve it from any liability which it may have to the
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to the Distributor or such controlling person or persons,
defendant or defendants in the suit. If the Fund elects to assume the defense of
any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Trustees in
connection with the issuance or sale of any of the Shares.

(b) The Distributor shall indemnify and hold harmless the Fund
and each of its Trustees and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in

9
<PAGE> 10

conformity with, information furnished to the Fund in writing by or on behalf of
the Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Fund, and the Fund and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.

Section 10. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until February 1, 2000 and thereafter as to any Series, but only so long
as such continuance is specifically approved at least annually by (i) the
Trustees, or by the vote of a majority of the outstanding voting securities of
the Series, and (ii) by the vote of a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.

This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.

The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.

Section 11. Amendments of this Agreement. This Agreement may be amended
as to any Series by the parties only if such amendment is specifically approved
by (i) the Trustees, or by

10
<PAGE> 11

the vote of a majority of outstanding voting securities of that Series, and (ii)
by the vote of a majority of those Trustees of the Fund who are not parties to
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.

Section 12. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.

Section 13. Agreement Binding Only on Fund Property. The Distributor
understands that the obligations of this Agreement are not binding upon any
shareholder of the Fund personally, but bind only the Fund's property; the
Distributor represents that it has notice of the provisions of the Fund's
Restated Declaration of Trust disclaiming shareholder liability for acts or
obligations of the Fund.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.

HOTCHKIS AND WILEY VARIABLE TRUST

By____________________________________________

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By____________________________________________

11
<PAGE> 12
EXHIBIT A

HOTCHKIS AND WILEY VARIABLE TRUST

SELECTED DEALER AGREEMENT

Gentlemen:

Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Hotchkis and Wiley Variable Trust, a Massachusetts business trust
(the "Fund"), pursuant to which it acts as the distributor for the sale of
shares of the Fund (collectively, the "Shares"), and as such has the right to
distribute Shares of the Fund for resale. The Fund is an open-end investment
company registered under the Investment Company Act of 1940, as amended, and its
Shares being offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Distribution Agreement between
ourself and the Fund and reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of Additional
Information" as used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement pursuant to
the Securities Act of 1933, as amended. As principal, we offer to sell to you,
as a member of the Selected Dealers Group, Shares of the Fund upon the following
terms and conditions:

1. In all sales of these Shares to the public you shall act as dealer
for your own account, and in no transaction shall you have any authority to act
as agent for the Fund, for us or for any other member of the Selected Dealers
Group.

2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.

3. You shall not place orders for any of the Shares unless you have
already received purchase orders for such Shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Shares except
under circumstances that will result in compliance with the applicable federal
and state securities laws and that in connection with the sales and offers to
sell Shares you will furnish to each person to whom any such sale or offer is
made a copy of the Prospectus and, if requested, the Statement of Additional
Information (as then amended or supplemented) and will not furnish to any person
any information relating to the Shares of the Fund which is inconsistent in any
respect with the information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.

<PAGE> 13

4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Shares of the Fund to be resold by us to you subject
to the applicable terms and conditions governing the placement of orders by us
set forth in Section 3 of the Distribution Agreement, and (ii) to tender Shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.

5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: e.g., by a change in the
"net asset value" from that used in determining the offering price to your
customers.

6. No person is authorized to make any representations concerning Shares
of the Fund except those contained in the current Prospectus and Statement of
Additional Information of the Fund and in such printed information subsequently
issued by us or the Fund as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Shares through us you shall
rely solely on the representations contained in the Prospectus and Statement of
Additional Information and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospectus, Statement of
Additional Information, periodic reports and proxy solicitation material are our
sole responsibility and not the responsibility of the Fund, and you agree that
the Fund shall have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.

7. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.

8. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Shares entirely. Each party hereto has the
right to cancel this Agreement upon notice to the other party.

9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.

10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and we both hereby agree to abide by the Conduct Rules
of such Association.

<PAGE> 14

11. Upon application to us, we will inform you as to the states in which
we believe notifications of the intention to sell the Shares have been duly
filed, or where no such notification is required, but we assume no
responsibility or obligation as to your right to sell Shares in any
jurisdiction. We will file with the Department of State in New York a Further
State Notice with respect to the Shares, if necessary.

12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.

13. Your first order placed pursuant to this Agreement for the purchase
of Shares of the Fund will represent your acceptance of this Agreement.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By________________________________________
(Authorized Signature)

Please return one signed copy of this Agreement to:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:

Firm Name:
------------------------------------------
By:
-------------------------------------------------
Address:
--------------------------------------------

-----------------------------------------------------
Date:
-----------------------------------------------

<PAGE> 1
EXHIBIT 99.B8.(A)

CUSTODIAN AGREEMENT

THIS AGREEMENT made on January 16, 1998, between Hotchkis
and Wiley Variable Trust, a Massachusetts business trust (hereinafter called
the ("Trust"), and FIRSTAR TRUST COMPANY, a corporation organized under the laws
of the State of Wisconsin (hereinafter called "Custodian"),

WHEREAS, the Trust desires that its securities and cash shall be
hereafter held and administered by Custodian pursuant to the terms of this
Agreement;

NOW, THEREFORE, in consideration of the mutual agreements herein
made, the Trust and Custodian agree as follows:

1. DEFINITIONS

The word "securities" as used herein includes stocks, shares, bonds,
debentures, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets.

The words "officers' certificate" shall mean a request or direction
or certification in writing signed in the name of the Trust by any two of the
President, a Vice President, the Secretary and the Treasurer of the Trust, or
any other persons duly authorized to sign by the Board.

The word "Board" shall mean Board of Trustees of the Trust.

2. NAMES, TITLES, AND SIGNATURES OF THE TRUST'S OFFICERS

An officer of the Trust will certify to Custodian the names and
signatures of those persons authorized to sign the officers' certificates
described in Section 1 hereof, and the names of the members of the Board,
together with any changes which may occur from time to time.

3. RECEIPT AND DISBURSEMENT OF MONEY

A. Custodian shall open and maintain a separate account or accounts
in the name of the Trust, subject only to draft or order by Custodian acting
pursuant to the terms of this Agreement. Custodian shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Trust. Custodian shall make payments of cash to, or for the
account of, the Trust from such cash only:

<PAGE> 2
(a) for the purchase of securities for the portfolio of the Trust
upon the delivery of such securities to Custodian, registered
in the name of the Trust or of the nominee of Custodian
referred to in Section 7 or in proper form for transfer;

(b) for the purchase of shares of the Trust upon proper
instructions from the Trust;

(c) for the payment of interest, dividends, taxes, investment
adviser's fees or operating expenses (including, without
limitation thereto, fees for legal, accounting, auditing and
custodian services and expenses for printing and postage);

(d) for payments in connection with the conversion, exchange or
surrender of securities owned or subscribed to by the Trust
held by or to be delivered to Custodian; or

(e) for other proper corporate purposes certified by resolution of
the Board of the Trust .

Before making any such payment, Custodian shall receive (and may
rely upon) an officers' certificate requesting such payment and stating that it
is for a purpose permitted under the terms of items (a), (b), (c), or (d) of
this Subsection A, and also, in respect of item (e), upon receipt of an
officers' certificate specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to whom such payment
is to be made, provided, however, that an officers' certificate need not precede
the disbursement of cash for the purpose of purchasing a money market
instrument, or any other security with same or next-day settlement, if the
President, a Vice President, the Secretary or the Treasurer of the Trust issues
appropriate oral or facsimile instructions to Custodian and an appropriate
officers' certificate is received by Custodian within two business days
thereafter.

B. Custodian is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received by Custodian for the
account of the Trust.

C. Custodian shall, upon receipt of proper instructions, make
federal funds available to the Trust as of specified times agreed upon from time
to time by the Trust and the Custodian in the amount of checks received in
payment for shares of the Trust which are deposited into the Trust's account.

2
<PAGE> 3
4. SEGREGATED ACCOUNTS

Upon receipt of proper instructions, the Custodian shall establish
and maintain a segregated account(s) for and on behalf of the Trust, into which
account(s) may be transferred cash and/or securities.

5. TRANSFER, EXCHANGE, REDELIVERY, ETC. OF SECURITIES

Custodian shall have sole power to release or deliver any securities
of the Trust held by it pursuant to this Agreement. Custodian agrees to
transfer, exchange or deliver securities held by it hereunder only:

(a) for sales of such securities for the account of the Trust upon
receipt by Custodian of payment therefore;

(b) when such securities are called, redeemed or retired or
otherwise become payable;

(d) in exchange for, or upon conversion into, other securities
alone or other securities and cash whether pursuant to any
plan of merger, consolidation, reorganization,
recapitalization or readjustment, or otherwise;

(e) upon conversion of such securities pursuant to their terms
into other securities;

(f) upon exercise of subscription, purchase or other similar
rights represented by such securities;

(g) for the purpose of exchanging interim receipts or temporary
securities for definitive securities;

(h) for the purpose of redeeming in kind shares of the Trust upon
delivery of proper instructions to Custodian; or

(i) for other proper corporate purposes.

As to any deliveries made by Custodian pursuant to items (a), (b),
(d), (e), (f), and (g), securities or cash receivable in exchange therefor
shall be deliverable to Custodian.

Before making any such transfer, exchange or delivery, Custodian
shall receive (and may rely upon) an officers' certificate requesting such
transfer, exchange or delivery, and stating that it is for a purpose permitted
under the terms of items (a), (b), (c), (d), (e), (f), (g), or (h) of

<PAGE> 4
this Section 5 and also, in respect of item (i), upon receipt of an officers'
certificate specifying the securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom delivery of such
securities shall be made, provided, however, that an officers' certificate need
not precede any such transfer, exchange or delivery of a money market
instrument, or any other security with same or next-day settlement, if the
President, a Vice President, the Secretary or the Treasurer of the Trust issues
appropriate oral or facsimile instructions to Custodian and an appropriate
officers' certificate is received by Custodian within two business days
thereafter.

6. CUSTODIAN'S ACTS WITHOUT INSTRUCTIONS

Unless and until Custodian receives an officers' certificate to the
contrary, Custodian shall: (a) present for payment all coupons and other income
items held by it for the account of the Trust, which call for payment upon
presentation and hold the cash received by it upon such payment for the account
of the Trust; (b) collect interest and cash dividends received, with notice to
the Trust, for the account of the Trust; (c) hold for the account of the
hereunder all stock dividends, rights and similar securities issued with respect
to any securities held by it hereunder; and (d) execute, as agent on behalf of
the Trust, all necessary ownership certificates required by the Internal Revenue
Code or the Income Tax Regulations of the United States Treasury Department or
under the laws of any state now or hereafter in effect, inserting the Trust's
name on such certificates as the owner of the securities covered thereby, to the
extent it may lawfully do so.

7. REGISTRATION OF SECURITIES

The Custodian shall hold and physically segregate for the account of
the Trust all non-cash property of the Trust, including all securities owned by
the Trust, other than securities held in a clearing agency or securities
depository as described in Section 14. Except as otherwise directed by an
officers' certificate, Custodian shall register all of the Trust's securities,
except such as are in bearer form, in the name of a registered nominee of
Custodian as defined in the Internal Revenue Code and any Regulations of the
Treasury Department issued hereunder or in any provision of any subsequent
federal tax law exempting such transaction from liability for stock transfer
taxes, and shall execute and deliver all such certificates in connection
therewith as may be required by such laws or regulations or under the laws of
any state. Custodian shall use its best efforts to the end that the specific
securities held by it hereunder shall be at all times identifiable in its
records.

The Trust shall from time to time furnish to Custodian appropriate
instruments to enable Custodian to hold or deliver in proper form for transfer,
or to register in the name of its registered nominee, any securities which it
may hold for the account of the Trust and which may from time to time be
registered in the name of the Trust.

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<PAGE> 5
8. VOTING AND OTHER ACTION

Neither Custodian nor any nominee of Custodian shall vote any of the
securities held hereunder by or for the account of the Trust, except in
accordance with the instructions contained in an officers' certificate.
Custodian shall deliver, or cause to be executed and delivered, to the Trust all
notices, proxies and proxy soliciting materials with relation to such
securities, such proxies to be executed by the registered holder of such
securities (if registered otherwise than in the name of the Trust), but without
indicating the manner in which such proxies are to be voted.

9. TRANSFER TAX AND OTHER DISBURSEMENTS

The Trust shall pay or reimburse Custodian from time to time for any
transfer taxes payable upon transfers of securities made hereunder, and for all
other necessary and proper disbursements and expenses made or incurred by
Custodian in the performance of this Agreement.

Custodian shall execute and deliver such certificates in connection
with securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any state, to exempt
from taxation any exemptable transfers and/or deliveries of any such securities.

10. CONCERNING CUSTODIAN

Custodian shall be paid as compensation for its services pursuant to
this Agreement such compensation as may from time to time be agreed upon in
writing between the two parties. Until modified in writing, such compensation
shall be as set forth in Exhibit A attached hereto.

Custodian shall not be liable for any action taken in good faith
upon any certificate herein described or certified copy of any resolution of the
Board, and may rely on the genuineness of any such document which it may in good
faith believe to have been validly executed.

The Trust agrees to indemnify and hold harmless Custodian and its
nominee from all taxes, charges, expenses, assessments, claims and liabilities
(including counsel fees) incurred or assessed against it or by its nominee in
connection with the performance of this Agreement, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct. Upon prior consent of the Trust, Custodian is authorized to charge
any account of the for such items.

In the event of any advance of cash for any purpose made by Custodian resulting
from orders or instructions of the Trust, or in the event that Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Agreement,
except such as may arise from its or its nominee's own negligent

5
<PAGE> 6
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the Trust shall be security therefor.

Custodian agrees to indemnify and hold harmless Trust from all charges,
expenses, assessments, and claims/liabilities (including counsel fees) incurred
or assessed against it in connection with the performance of this agreement,
except such as may arise from the Trust's own negligent action, negligent
failure to act, or willful misconduct.

11. SUBCUSTODIANS

Custodian is hereby authorized to engage another bank or trust
company as a Subcustodian for all or any part of the Trust's assets, so long as
any such bank or trust company is a bank or trust company organized under the
laws of any state of the United States, having an aggregate capital, surplus and
undivided profit, as shown by its last published report, of not less than Two
Million Dollars ($2,000,000) and provided further that, if the Custodian
utilizes the services of a Subcustodian, the Custodian shall remain fully liable
and responsible for any losses caused to the Trust by the Subcustodian as fully
as if the Custodian was directly responsible for any such losses under the terms
of the Custodian Agreement.

Notwithstanding anything contained herein, if the Trust requires the
Custodian to engage specific Subcustodians for the safekeeping and/or clearing
of assets, the Trust agrees to indemnify and hold harmless Custodian from all
claims, expenses and liabilities incurred or assessed against it in connection
with the use of such Subcustodian in regard to the Trust's assets, except as may
arise from its own negligent action, negligent failure to act or willful
misconduct.

12. REPORTS BY CUSTODIAN

Custodian shall furnish the Trust periodically as agreed upon with a
statement summarizing all transactions and entries for the account of Trust.
Custodian shall furnish to the Trust, at the end of every month, a list of the
portfolio securities showing the aggregate cost of each issue. The books and
records of Custodian pertaining to its actions under this Agreement shall be
open to inspection and audit at reasonable times by officers of, and of auditors
employed by, the Trust.

13. TERMINATION OR ASSIGNMENT

This Agreement may be terminated by the Trust, or by Custodian, on
ninety (90) days notice, given in writing and sent by registered mail to
Custodian at P.O. Box 2054, Milwaukee, Wisconsin 53201, or to the Trust at 800
West Sixth Street, Suite 540, Los Angeles, California 90017, as the case may be.
Upon any termination of this Agreement, pending appointment of a successor to
Custodian or a vote of the shareholders of the Trust to dissolve or to function
without a custodian of its cash, securities and other property, Custodian shall
not deliver cash, securities or other property of the Trust to the Trust, but
may deliver them to a bank or trust company of its own selection, having an
aggregate capital, surplus and undivided profits, as shown by its last published
report of not less than Two Million Dollars ($2,000,000) as a

<PAGE> 7
custodian for the Trust to be held under terms similar to those of this
Agreement, provided, however, that Custodian shall not be required to make any
such delivery or payment until full payment shall have been made by the Trust of
all liabilities constituting a charge on or against the properties then held by
Custodian or on or against Custodian, and until full payment shall have been
made to Custodian of all its fees, compensation, costs and expenses, subject to
the provisions of Section 10 of this Agreement.

This Agreement may not be assigned by Custodian without the consent
of the Trust, authorized or approved by a resolution of its Board.

14. DEPOSITS OF SECURITIES IN SECURITIES DEPOSITORIES

No provision of this Agreement shall be deemed to prevent the use by
Custodian of a central securities clearing agency or securities depository,
provided, however, that Custodian and the central securities clearing agency or
securities depository meet all applicable federal and state laws and
regulations, and the Board of the Trust approves by resolution the use of such
central securities clearing agency or securities depository.

15. RECORDS

To the extent that Custodian in any capacity prepares or maintains
any records required to be maintained and preserved by the Trust pursuant to the
provisions of the Investment Company Act of 1940, as amended, or the rules and
regulations promulgated thereunder, Custodian agrees to make any such records
available to the Trust upon request and to preserve such records for the periods
prescribed in Rule 31a-2 under the Investment Company Act of 1940, as amended.

16. AGREEMENT BINDING ONLY IN TRUST PROPERTY

The Custodian understands that the obligations of this Agreement are
not binding upon any shareholder of the Trust personally, but bind only the
Trust's property. The Custodian represents that it has notice of the provision
of the Trust's Declaration of Trust disclaiming shareholder liability for acts
or obligations of the Trust.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and their respective corporate seals to be affixed hereto as of the
date first above-written by their respective officers thereunto duly authorized.

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<PAGE> 8
Attest: FIRSTAR TRUST COMPANY

By
- ----------------------------- -----------------------------------
Assistant Secretary Vice President

Attest: HOTCHKIS AND WILEY VARIABLE TRUST

By
- --------------------------------- ----------------------------------

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<PAGE> 9

Exhibit A

Hotchkis and Wiley Trust
Custody Services
Annual Fee Schedule - Domestic Funds

o Annual fee based upon market value

o 2 basis points per year
o minimum annual fee per fund - $3,000

o Investment transactions (purchase, sale, exchange, tender, redemption,
maturity, receipt, delivery):

o $12.00 per book entry security (depository or Federal Reserve
System)
o $25.00 per definitive security (physical)
o $25.00 per mutual fund trade
o $75.00 per Euroclear
o $8.00 per principal reduction on pass-through certificates
o $35.00 per option/futures contract
o $15.00 per variation margin
o $15.00 per Fed wire deposit or withdrawal

o Variable Amount Demand Notes: used as a short-term investment, variable
amount notes offer safety and prevailing high interest rates. Our charge,
which is 1/4 of 1%, is deducted from the variable amount note income at the
time it is credited to your account.

o Plus out-of-pocket expenses, and extraordinary expenses based upon
complexity.

o Fees are billed monthly, based upon market value at the beginning of the
month.

<PAGE> 1
EXHIBIT 99.B8.(B)

GLOBAL CUSTODY TRI-PARTY AGREEMENT

This AGREEMENT is effective July 1, 1997, and is between THE CHASE
MANHATTAN BANK, N.A. (the "Bank") and Firstar Trust (the "Customer") and
Hotchkis & Wiley Variable Trust (the "Fund").

1. CUSTOMER ACCOUNTS.

The Bank agrees to establish and maintain the following accounts
("Accounts"):

(a) A custody account in the name of the Customer ("Custody Account")
for any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and

(b) A deposit account in the name of the Customer ("Deposit Account")
for any and all cash in any currency received by the Bank or its Subcustodian
for the account of the Customer, which cash shall not be subject to withdrawal
by draft or check.

The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions (as
defined in Section 11) concerning the Accounts. The Bank may deliver securities
of the same class in place of those deposited in the Custody Account.

Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional Accounts
under the terms of this Agreement.

2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.

Unless Instructions specifically require another location acceptable to
the Bank:

(a) Securities will be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and

(b) Cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.

Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and the Bank can comply with such
Instructions, the Bank is authorized to maintain cash balances on deposit for
the Customer with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the Bank.

If the Customer wishes to have any of its Assets held in the custody of
an institution other than the established Subcustodians as defined in Section 3
(or their securities depositories), such arrangement must be authorized by a
written agreement, signed by the Bank and the Customer.

<PAGE> 2
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.

The Bank may act under this Agreement through the subcustodians listed
in Schedule A of this Agreement with which the Bank has entered into
subcustodial agreements ("Subcustodians"). The Customer authorizes the Bank to
hold Assets in the Accounts in accounts which the Bank has established with one
or more of its branches or Subcustodians. The Bank and Subcustodians are
authorized to hold any of the Securities in their account with any securities
depository in which they participate.

The Bank reserves the right to add new, replace or remove Subcustodians.
The Customer will be given reasonable notice by the Bank of any amendment to
Schedule A. Upon request by the Customer, the Bank will identify the name,
address and principal place of business of any Subcustodian of the Customer's
Assets and the name and address of the governmental agency or other regulatory
authority that supervises or regulates such Subcustodian.

4. USE OF SUBCUSTODIAN.

(a) The Bank will identify such Assets on its books as belonging to the
Customer.

(b) A Subcustodian will hold such Assets together with assets belonging
to other customers of the Bank in accounts identified on such Subcustodian's
books as special custody accounts for the exclusive benefit of customers of the
Bank.

(c) Any Assets in the Accounts held by a Subcustodian will be subject
only to the instructions of the Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian will be subject only to
the instructions of such Subcustodian.

(d) Any agreement the Bank enters into with a Subcustodian for holding
its customer's assets shall provide that such assets will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
the Customer with any particular Subcustodian.

5. DEPOSIT ACCOUNT TRANSACTIONS.

(a) The Bank or its Subcustodians will make payments from the Deposit
Account upon receipt of Instructions which include all information required by
the Bank.

(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, the Bank, in its discretion,
may advance the Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by the Bank on
similar loans.

(c) If the Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, the Customer will
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If the Customer does not promptly return
any amount upon such notification, the Bank shall be entitled, upon oral or
written notification to the Customer, to

2
<PAGE> 3
reverse such credit by debiting the Deposit Account for the amount previously
credited. The Bank or its Subcustodian shall have no duty or obligation to
institute legal proceedings, file a claim or a proof of claim in any insolvency
proceeding or take any other action with respect to the collection of such
amount, but may act for the Customer upon Instructions after consultation with
the Customer.

6. CUSTODY ACCOUNT TRANSACTIONS.

(a) Securities will be transferred, exchanged or delivered by the Bank
or its Subcustodian upon receipt by the Bank of Instructions which include all
information required by the Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.

(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions will be
credited or debited to the Accounts on the date cash or Securities are actually
received by the Bank and reconciled to the Account.

(i) The Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a
reasonable period, determined by the Bank in its discretion, after the
contractual settlement date for the related transaction.

(ii) If any Securities delivered pursuant to this Section 6 are returned
by the recipient thereof, the Bank may reverse the credits and debits of
the particular transaction at any time.

7. ACTIONS OF THE BANK.

The Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, the Bank
will:

(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that the Bank or Subcustodian
is actually aware of such opportunities.

(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.

(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank or any
Subcustodian.

(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.

<PAGE> 4

The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of the
Assets. Unless the Customer sends the Bank a written exception or objection to
any Bank statement within sixty (60) days of receipt, the Customer shall be
deemed to have approved such statement. In such event, or where the Customer has
otherwise approved any such statement, the Bank shall, to the extent permitted
by law, be released, relieved and discharged with respect to all matters set
forth in such statement or reasonably implied therefrom as though it had been
settled by the decree of a court of competent jurisdiction in an action where
the Customer and all persons having or claiming an interest in the Customer or
the Customer's Accounts were parties.

All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of the
Customer. The Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which the Bank has agreed to take any action under this Agreement.

8. CORPORATE ACTIONS; PROXIES.

Whenever the Bank receives information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities (other
than a proxy), such as subscription rights, bonus issues, stock repurchase plans
and rights offerings, or legal notices or other material intended to be
transmitted to securities holders ("Corporate Actions"), the Bank will give the
Customer notice of such Corporate Actions to the extent that the Bank's central
corporate actions department has actual knowledge of a Corporate Action in time
to notify its customers.

When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, the Bank will endeavor to obtain
Instructions from the Customer or its Authorized Person, but if Instructions are
not received in time for the Bank to take timely action, or actual notice of
such Corporate Action was received too late to seek Instructions, the Bank is
authorized to sell such rights entitlement or fractional interest and to credit
the Deposit Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any such
action.

The Bank will deliver proxies to the Customer or its designated agent
pursuant to special arrangements which may have been agreed to in writing. Such
proxies shall be executed in the appropriate nominee name relating to Securities
in the Custody Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted; and where bearer
Securities are involved, proxies will be delivered in accordance with
Instructions.

9. NOMINEES.

Securities which are ordinarily held in registered form may be
registered in a nominee name of the Bank, Subcustodian or securities depository,
as the case may be. The Bank may without notice to the Customer cause any such
Securities to cease to be registered in the name of any such nominee and to be
registered in the name of the Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by the issuer,
the Bank may allot the called portion to the respective beneficial holders of
such class of security in any manner the Bank deems to be fair and equitable.
The Customer agrees to hold the Bank, Subcustodians, and their respective
nominees harmless from any liability arising directly or indirectly from their
status as a mere record holder of Securities in the Custody Account.

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<PAGE> 5
10. AUTHORIZED PERSONS.

As used in this Agreement, the term "Authorized Person" means employees
or agents including investment managers as have been designated by written
notice from the Customer or its designated agent to act on behalf of the
Customer under this Agreement. Such persons shall continue to be Authorized
Persons until such time as the Bank receives Instructions from the Customer or
its designated agent that any such employee or agent is no longer an Authorized
Person.

11. INSTRUCTIONS.

The term "Instructions" means instructions of any Authorized Person
received by the Bank, via telephone, telex, TWX, facsimile transmission, bank
wire or other teleprocess or electronic instruction or trade information system
acceptable to the Bank which the Bank believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded.

Any Instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but the Customer will hold the
Bank harmless for the failure of an Authorized Person to send such confirmation
in writing, the failure of such confirmation to conform to the telephone
instructions received or the Bank's failure to produce such confirmation at any
subsequent time. The Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.

12. STANDARD OF CARE; LIABILITIES.

(a) The Bank shall be responsible for the performance of only such
duties as are set forth in this Agreement or expressly contained in Instructions
which are consistent with the provisions of this Agreement as follows:

(i) The Bank will use reasonable care with respect to its obligations
under this Agreement and the safekeeping of Assets. The Bank shall be
liable to the Customer for any loss which shall occur as the result of
the failure of a Subcustodian to exercise reasonable care with respect
to the safekeeping of such Assets to the same extent that the Bank would
be liable to the Customer if the Bank were holding such Assets in New
York. In the event of any loss to the Customer by reason of the failure
of the Bank or its Subcustodian to utilize reasonable care, the Bank
shall be liable to the Customer only to the extent of the Customer's
direct damages, to be determined based on the market value of the
property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or
circumstances.

(ii) The Bank will not be responsible for any act, omission, default or
for the solvency of any broker or agent which it or a Subcustodian
appoints unless such appointment was made negligently or in bad faith.

(iii) The Bank shall be indemnified by, and without liability to the
Customer for any action taken or omitted by the Bank whether pursuant to
Instructions or otherwise within the scope of this Agreement if such act
or omission was in good faith, without negligence. In performing its

<PAGE> 6

obligations under this Agreement, the Bank may rely on the genuineness
of any document which it believes in good faith to have been validly
executed.

(iv) The Customer agrees to pay for and hold the Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.

(v) The Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for the Customer) on all matters and shall
be without liability for any action reasonably taken or omitted pursuant
to such advice.

(vi) The Bank need not maintain any insurance for the benefit of the
Customer.

(vii) Without limiting the foregoing, the Bank shall not be liable for
any loss which results from: 1) the general risk of investing, or 2)
investing or holding Assets in a particular country including, but not
limited to, losses resulting from nationalization, expropriation or
other governmental actions; regulation of the banking or securities
industry; currency restrictions, devaluations or fluctuations; and
market conditions which prevent the orderly execution of securities
transactions or affect the value of Assets.

(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes or
work stoppages, acts of war or terrorism, insurrection, revolution,
nuclear fusion, fission or radiation, or acts of God.

(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that the Bank shall have no duty or
responsibility to:

(i) question Instructions or make any suggestions to the Customer or an
Authorized Person regarding such Instructions;

(ii) supervise or make recommendations with respect to investments or
the retention of Securities;

(iii) advise the Customer or an Authorized Person regarding any default
in the payment of principal or income of any security other than as
provided in Section 5(c) of this Agreement;

(iv) evaluate or report to the Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party to
which Securities are delivered or payments are made pursuant to this
Agreement;

(v) review or reconcile trade confirmations received from brokers. The
Customer or its Authorized Persons (as defined in Section 10) issuing
Instructions shall bear any responsibility to review such confirmations
against Instructions issued to and statements issued by the Bank.

(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may have a
material interest in a transaction, or circumstances are such that the Bank may
have a potential conflict of duty or interest including the fact that the Bank
or any of its affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than one customer,
have a material interest in the issue of Securities, or earn profits from any of
the activities listed herein.

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<PAGE> 7

13. FEES AND EXPENSES.

The Customer agrees to pay the Bank for its services under this
Agreement such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not limited to,
legal fees. The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under any provision of
this Agreement.

14. MISCELLANEOUS.

(a) Foreign Exchange Transactions. To facilitate the administration of
the Customer's trading and investment activity, the Bank is authorized to enter
into spot or forward foreign exchange contracts with the Customer or an
Authorized Person for the Customer and may also provide foreign exchange through
its subsidiaries, affiliates or Subcustodians. Instructions, including standing
instructions, may be issued with respect to such contracts but the Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of the Bank,
its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement shall apply to such transaction.

(b) Certification of Residency, etc. The Customer certifies that it is a
resident of the United States and agrees to notify the Bank of any changes in
residency. The Bank may rely upon this certification or the certification of
such other facts as may be required to administer the Bank's obligations under
this Agreement. The Customer will indemnify the Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.

(c) Access to Records. The Bank shall allow the Customer's independent
public accountant reasonable access to the records of the Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to the Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of any
Subcustodian which has physical possession of any Assets as may be required in
connection with the examination of the Customer's books and records.

(d) Governing Law; Successors and Assigns. This Agreement shall be
governed by the laws of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Bank.

(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):

Employee Benefit Plan or other assets subject to the Employee
--- Retirement Income Security Act of 1974, as amended ("ERISA");

X Mutual Fund assets subject to certain Securities and Exchange
--- Commission ("SEC") rules and regulations;

7
<PAGE> 8

Neither of the above.
---

This Agreement consists exclusively of this document together with
Schedule A, Exhibits I - _______ and the following Rider(s) [Check
applicable rider(s)]:

ERISA
---

X MUTUAL FUND
---

SPECIAL TERMS AND CONDITIONS
---

There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the parties.
Any amendment to this Agreement must be in writing, executed by both parties.

(f) Severability. In the event that one or more provisions of this
Agreement are held invalid, illegal or enforceable in any respect on the basis
of any particular circumstances or in any jurisdiction, the validity, legality
and enforceability of such provision or provisions under other circumstances or
in other jurisdictions and of the remaining provisions will not in any way be
affected or impaired.

(g) Waiver. Except as otherwise provided in this Agreement, no failure
or delay on the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial exercise of any
power or right preclude any other or further exercise, or the exercise of any
other power or right. No waiver by a party of any provision of this Agreement,
or waiver of any breach or default, is effective unless in writing and signed by
the party against whom the waiver is to be enforced.

(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may be required
under this Agreement are to be sent to the parties at the following addresses or
such other addresses as may subsequently be given to the other party in writing:

Bank: The Chase Manhattan Bank, N.A.
Chase MetroTech Center
Brooklyn, NY 11245
Attention: Global Custody Division

or telex:_________________________

Customer: Firstar Trust Company
615 East Michigan Street
Milwaukee, WI 53202

8
<PAGE> 9
Fund: Hotchkis & Wiley
800 West Sixth Street Ste 540
Los Angeles, CA 90017

(i) Termination. This Agreement may be terminated by the Customer or the
Bank by giving sixty (60) days written notice to the other, provided that such
notice to the Bank shall specify the names of the persons to whom the Bank shall
deliver the Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within sixty (60) days following receipt of the
notice, deliver to the Bank Instructions specifying the names of the persons to
whom the Bank shall deliver the Assets. In either case the Bank will deliver the
Assets to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within sixty (60)
days following receipt of a notice of termination by the Bank, the Bank does not
receive Instructions from the Customer specifying the names of the persons to
whom the Bank shall deliver the Assets, the Bank, at its election, may deliver
the Assets to a bank or trust company doing business in the State of New York to
be held and disposed of pursuant to the provisions of this Agreement, or to
Authorized Persons, or may continue to hold the Assets until Instructions are
provided to the Bank.

CUSTOMER

By: /s/ Joe D. Redwine
-----------------------------------
Vice President

THE CHASE MANHATTAN BANK

By: /s/ Edward G. McGann
-------------------------------------

FUND

By: /s/ Nancy D. Celick
-------------------------------------
President

9
<PAGE> 10
Mutual Fund Rider to Global Custody Tri-Party Agreement
Between The Chase Manhattan Bank and
Firstar Trust and
Hotchkis & Wiley Variable Trust, effective July 1, 1997

Customer represents that the Assets being placed in the Bank's custody
are subject to the Investment Company Act of 1940 (the Act), as the same may be
amended from time to time.

Except to the extent that the Bank has specifically agreed to comply
with a condition of a rule, regulation, interpretation promulgated by or under
the authority of the SEC or the Exemptive Order applicable to accounts of this
nature issued to the Bank (Investment Company Act of 1940, Release No. 12053,
November 20, 1981), as amended, or unless the Bank has otherwise specifically
agreed, the Customer shall be solely responsible to assure that the maintenance
of Assets under this Agreement complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of the
Securities Exchange Commission.

The following modifications are made to the Agreement:

Section 3. Subcustodians and Securities Depositories.

Add the following language to the end of Section 3:

The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible
foreign custodian or an eligible foreign securities depository, which
are further defined as follows:

(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined in
Rule 17f-5 under the Investment Company Act of 1940;

(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company incorporated or organized under the laws of a country
other than the United States that is regulated as such by that country's
government

<PAGE> 11

or an agency thereof and that has shareholders' equity in excess of $200
million in U.S. currency (or a foreign currency equivalent thereof),
(ii) a majority owned direct or indirect subsidiary of a qualified U.S.
bank or bank holding company that is incorporated or organized under the
laws of a country other than the United States and that has
shareholders' equity in excess of $100 million in U.S. currency (or a
foreign currency equivalent thereof)(iii) a banking institution or trust
company incorporated or organized under the laws of a country other than
the United States or a majority owned direct or indirect subsidiary of a
qualified U.S. bank or bank holding company that is incorporated or
organized under the laws of a country other than the United States which
has such other qualifications as shall be specified in Instructions and
approved by the Bank; or (iv) any other entity that shall have been so
qualified by exemptive order, rule or other appropriate action of the
SEC; and

(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws
of a country other than the United States, which operates (i) the
central system for handling securities or equivalent book-entries in
that country, or (ii) a transnational system for the central handling of
securities or equivalent book-entries.

The Customer represents that its Board of Directors has approved each of
the Subcustodians listed in Schedule A to this Agreement and the terms of the
subcustody agreements between the Bank and each Subcustodian, which are attached
as Exhibits I through of Schedule A, and further represents that its Board has
determined that the use of each Subcustodian and the terms of each subcustody
agreement are consistent with the best interests of the Fund(s) and its (their)
shareholders. The Bank will supply the Customer with any amendment to Schedule A
for approval. The Customer has supplied or will supply the Bank with certified
copies of its Board of Directors resolution(s) with respect to the foregoing
prior to placing Assets with any Subcustodian so approved.

Section 11. Instructions.

Add the following language to the end of Section 11:

Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 of this Agreement may be made only for the purposes
listed below. Instructions must specify the purpose for which any
transaction is to be made and Customer shall be solely responsible to
assure that Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be set forth in
its prospectus.

11
<PAGE> 12

(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;

(b) When Securities are called, redeemed or retired, or otherwise become
payable;

(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;

(d) Upon conversion of Securities pursuant to their terms into other
securities;

(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;

(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;

(g) In connection with any borrowings by the Customer requiring a pledge
of Securities, but only against receipt of amounts borrowed;

(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer;

(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of, the
Bank, its Subcustodian or the Customer's transfer agent, such shares to
be purchased or redeemed;

(j) For the purpose of redeeming in kind shares of the Customer against
delivery to the Bank, its Subcustodian or the Customer's transfer agent
of such shares to be so redeemed;

(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Bank and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization
or organizations, regarding escrow or other arrangements in connection
with transactions by the Customer;

<PAGE> 13

(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to the Bank of monies for the premium due and a receipt for
the Securities which are to be held in escrow. Upon exercise of the
option, or at expiration, the Bank will receive from brokers the
Securities previously deposited. The Bank will act strictly in
accordance with Instructions in the delivery of Securities to be held in
escrow and will have no responsibility or liability for any such
Securities which are not returned promptly when due other than to make
proper request for such return;

(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;

(n) For other proper purposes as may be specified in Instructions issued
by an officer of the Customer which shall include a statement of the
purpose for which the delivery or payment is to be made, the amount of
the payment or specific Securities to be delivered, the name of the
person or persons to whom delivery or payment is to be made, and a
certification that the purpose is a proper purpose under the instruments
governing the Customer; and

(o) Upon the termination of this Agreement as set forth in Section
14(i).

Section 12. Standard of Care; Liabilities.

Add the following subsection (c) to Section 12:

(c) The Bank hereby warrants to the Customer that in its opinion, after
due inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. bank, each eligible foreign
custodian and each eligible foreign securities depository holding the
Customer's Securities pursuant to this Agreement afford protection for
such Securities at least equal to that afforded by the Bank's
established procedures with respect to similar securities held by the
Bank and its securities depositories in New York.

Section 14. Access to Records.

Add the following language to the end of Section 14(c):

13
<PAGE> 14

Upon reasonable request from the Customer, the Bank shall furnish the
Customer such reports (or portions thereof) of the Bank's system of
internal accounting controls applicable to the Bank's duties under this
Agreement. The Bank shall endeavor to obtain and furnish the Customer
with such similar reports as it may reasonably request with respect to
each Subcustodian and securities depository holding the Customer's
assets.

<PAGE> 1

EXHIBIT 99.B9(A)

FUND ADMINISTRATION SERVICING AGREEMENT

This Agreement is made and entered into on this ___________________ day of
__________________, 1998, by and between Hotchkis and Wiley Variable Trust
(hereinafter referred to as the "Trust") and Firstar Trust Company, a
corporation organized under the laws of the State of Wisconsin (hereinafter
referred to as "FTC").

WHEREAS, The Trust is an open-ended management investment company/companies
which is/are registered under the Investment Company Act of 1940;

WHEREAS, FTC is a trust company and, among other things, is in the business of
providing fund administration services for the benefit of its customers;

NOW, THEREFORE, the Trust and FTC do mutually promise and agree as follows:

I. Appointment of Administrator

The Trust hereby appoints FTC as Administrator of the Trust on the terms
and conditions set forth in this Agreement, and FTC hereby accepts such
appointment and agrees to perform the services and duties set forth in
this Agreement in consideration of the compensation provided for herein.

II. Duties and Responsibilities of FTC

A. General Trust Management

1. Act as liaison among all fund service providers

2. Audits

a. Prepare appropriate schedules and assist independent
auditors

b. Provide information to SEC and facilitate audit process

c. Provide office facilities

3. Assist in overall operations of the Trust

4. Coordinate payment of Trust expenses as directed by adviser

<PAGE> 2

5. Evaluate Trust expenses vs. Industry and service environment

6. Monitor expense accruals and payments

B. Compliance

1. Regulatory Compliance

a. Periodically monitor compliance with Investment Company
Act of 1940 requirements

1) Asset diversification tests

2) Total return and SEC yield calculations

3) Maintenance of books and records under Rule 31a-3

b. Periodically monitor Trust's compliance with the policies
and investment limitations of the Trust as set forth in its
prospectus and statement of additional information

2. Blue Sky Compliance

a. Prepare and file with the appropriate state securities
authorities any and all required compliance filings
relating to the registration of the securities of the Trust
so as to enable the Trust to make a continuous offering of
its shares

b. Monitor status and maintain registrations in each state

3. SEC Registration and Reporting

a. Assisting Trust's counsel in updating prospectus and
statement of additional information; and in preparing proxy
statements, and Rule 24f-2 notice,

b. Assist in preparing annual and semiannual reports and
file with SEC

c. Prepare and file Form N-SAR

4. IRS Compliance

a. Periodically monitor Trust's status as a regulated
investment company under Subchapter M through review of the
following:

1) Asset diversification requirements

2) Qualifying income requirements

3) Distribution requirements

b. Monitor short short testing

c. Calculate required distributions (including excise tax
distributions)

<PAGE> 3

C. Financial Reporting

1. Prepare financial reports for shareholders, the Board, the SEC,
and independent auditors

2. Supervise the Trust's Custodian and Fund Accountants in the
maintenance of the Trust's general ledger and in the
preparation of the Trust's financial statements including
oversight of expense accruals and payments, of the
determination of net asset value of the Trust's net assets and
of the Trust's shares, and of the declaration and payment of
dividends and other distributions to shareholders

D. Tax Reporting

1. Prepare state income breakdowns where relevant

2. File 1099 Miscellaneous for payments to directors and other
service providers

3. Monitor wash losses

4. Calculate eligible dividend income for corporate shareholders

III. Compensation

The Trust agrees to pay FTC for performance of the duties listed in this
Agreement and the fees and out-of-pocket expenses as set forth in the
attached Schedule A.

These fees may be changed from time to time, subject to mutual written
Agreement between the Trust and FTC.

The Trust agrees to pay all fees and reimbursable expenses within ten
(10) business days following the mailing of the billing notice.

IV. Performance of Service; Limitation of Liability

A. FTC shall exercise reasonable care in the performance of its
duties under this Agreement. FTC shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which this Agreement relates, including
losses resulting from mechanical breakdowns or the failure of
communication or power supplies beyond FTC's control, except a loss
resulting from FTC's refusal or failure to comply with the terms of this
Agreement or from bad faith, negligence, or willful misconduct on its
part in the performance of its duties under this Agreement.
Notwithstanding any other provision of this Agreement, the Trust shall
indemnify and hold harmless FTC from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without
basis in fact or law) of any and every nature (including reasonable
attorneys' fees) which FTC may sustain or incur or which may be

3
<PAGE> 4
asserted against FTC by any person arising out of any action taken or
omitted to be taken by it in performing the services hereunder (i) in
accordance with the foregoing standards, or (ii) in reliance upon any
written or oral instruction provided to FTC by any duly authorized
officer of the Trust, such duly authorized officer to be included in a
list of authorized officers furnished to FTC and as amended from time to
time in writing by resolution of the Board of Trustees of the Trust.

In the event of a mechanical breakdown or failure of
communication or power supplies beyond its control, FTC shall take all
reasonable steps to minimize service interruptions for any period that
such interruption continues beyond FTC's control. FTC will make every
reasonable effort to restore any lost or damaged data and correct any
errors resulting from such a breakdown at the expense of FTC. FTC agrees
that it shall, at all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of
electrical data processing equipment to the extent appropriate equipment
is available. Representatives of the Trust shall be entitled to inspect
FTC's premises and operating capabilities at any time during regular
business hours of FTC, upon reasonable notice to FTC.

Regardless of the above, FTC reserves the right to reprocess
and correct administrative errors at its own expense.

B. In order that the indemnification provisions contained in this
section shall apply, it is understood that if in any case the Trust may
be asked to indemnify or hold FTC harmless, the Trust shall be fully and
promptly advised of all pertinent facts concerning the situation in
question, and it is further understood that FTC will use all reasonable
care to notify the Trust promptly concerning any situation which
presents or appears likely to present the probability of such a claim
for indemnification against theTrust. The Trust shall have the option to
defend FTC against any claim which may be the subject of this
indemnification. In the event that the Trust so elects, it will so
notify FTC and thereupon the Trust shall take over complete defense of
the claim, and FTC shall in such situation initiate no further legal or
other expenses for which it shall seek indemnification under this
section. FTC shall in no case confess any claim or make any compromise
in any case in which the Fund will be asked to indemnify FTC except with
the Trust's prior written consent.

C. FTC shall indemnify and hold the Trust harmless from and against
any and all claims, demands, losses, expenses, and liabilities (whether
with or without basis in fact or law) of any and every nature (including
reasonable attorneys' fees) which may be asserted against the Trust by
any person arising out of any action taken or omitted to be taken by FTC
as a result of FTC's refusal or failure to comply with the terms of this
Agreement, its bad faith, negligence, or willful misconduct.

4
<PAGE> 5
V. Confidentiality

FTC shall handle, in confidence, all information relating to the Trust's
business which is received by FTC during the course of rendering any
service hereunder.

VI. Data Necessary to Perform Service

The Trust or its agent, which may be FTC, shall furnish to FTC the data
necessary to perform the services described herein at times and in such
form as mutually agreed upon.

VII. Terms of Agreement

This Agreement shall become effective as of the date hereof and,
unless sooner terminated as provided herein, shall continue
automatically in effect for successive annual periods. The Agreement may
be terminated by either party upon giving ninety (90) days prior written
notice to the other party or such shorter period as is mutually agreed
upon by the parties.

VIII. Duties in the Event of Termination

In the event that, in connection with termination, a successor to any of
FTC's duties or responsibilities hereunder is designated by the Trust by
written notice to FTC, FTC will promptly, upon such termination and at
the expense of the Trust, transfer to such successor all relevant books,
records, correspondence, and other data established or maintained by FTC
under this Agreement in a form reasonably acceptable to the Trust (if
such form differs from the form in which FTC has maintained, the Trust
shall pay any expenses associated with transferring the data to such
form), and will cooperate in the transfer of such duties and
responsibilities, including provision for assistance from FTC's
personnel in the establishment of books, records, and other data by such
successor.

IX. Choice of Law

This Agreement shall be construed in accordance with the laws of the
State of Wisconsin.

X. Notices

Notices of any kind to be given by either party to the other party shall
be in writing and shall be duly given if mailed or delivered as follows:
Notice to FTC shall be sent to __________________, and notice to Trust
shall be sent to ____________________.

5
<PAGE> 6
XI. Records

FTC shall keep records relating to the services to be performed
hereunder, in the form and manner, and for such period as it may deem
advisable and is agreeable to the Trust but not inconsistent with the
rules and regulations of appropriate government authorities, in
particular, Section 31 of the Investment Company Act of 1940 as amended
(the "Investment Company Act"), and the rules thereunder. FTC agrees
that all such records prepared or maintained by FTC relating to the
services to be performed by FTC hereunder are the property of the Trust
and will be preserved, maintained, and made available with such section
and rules of the Investment Company Act and will be promptly surrendered
to the Trust on and in accordance with its request.

XII. Agreement required by Declaration of Trust Binding Only on Trust
Property

FTC understands that the obligations of this Agreement are not binding
upon any shareholder of the Trust personally, but bind only the Trust's
property. FTC represents that it has notice of the provisions of the Trust's
Declaration of Trust disclaiming shareholder liability for acts or obligations
of the Trust.

HOTCHKIS AND WILEY VARIABLE TRUST FIRSTAR TRUST COMPANY

By: By:
-------------------------------- -----------------------------------

Attest: Attest:
----------------------------- -------------------------------

<PAGE> 1

EXHIBIT 99.B9(B)

TRANSFER AGENT AGREEMENT

THIS AGREEMENT is made and entered into on this __________ day of
_________, 1998 by and between Hotchkis and Wiley Variable Trust (hereinafter
referred to as the "Trust") and Firstar Trust Company, a corporation organized
under the laws of the State of Wisconsin (hereinafter referred to as the
"Agent").

WHEREAS, the Trust is an an open-ended management investment company which
is registered under the Investment Company Act of 1940; and

WHEREAS, the Agent is a trust company and, among other things, is in the
business of administering transfer and dividend disbursing agent functions for
the benefit of its customers;

NOW, THEREFORE, the and the Agent do mutually promise and agree as
follows:

1. TERMS OF APPOINTMENT; DUTIES OF THE AGENT

Subject to the terms and conditions set forth in this Agreement, the Trust
hereby employs and appoints the Agent to act as transfer agent and dividend
disbursing agent.

The Agent shall perform all of the customary services of a transfer agent
and dividend disbursing agent, and as relevant, agent in connection with
accumulation, open account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to:

A. Receive orders for the purchase of shares;

B. Process purchase orders and issue the appropriate number of
certificated or uncertificated shares with such uncertificated
shares being held in the appropriate shareholder account;

C. Process redemption requests received in good order;

D. Pay monies where relevant in accordance with the instructions of
redeeming shareholders;

E. Process transfers of shares in accordance with the shareowner's
instructions;

F. Process exchanges between funds within the same family of funds;

G. Issue and/or cancel certificates as instructed; replace lost, stolen
or destroyed certificates upon receipt of satisfactory
indemnification or surety bond;

H. Prepare and transmit payments for dividends and distributions
declared by the Trust;

I. Make changes to shareholder records, including, but not limited to,
address changes in plans (i.e., systematic withdrawal, automatic
investment, dividend reinvestment, etc.);

<PAGE> 2

J. Record the issuance of shares of the Trust and maintain, pursuant to
Securities Exchange Act of 1934 Rule 17ad-10(e), a record of the
total number of shares of the which are authorized, issued and
outstanding;

K. Prepare shareholder meeting lists and, if applicable, mail, receive
and tabulate proxies;

L. Mail shareholder reports and prospectuses to current shareholders;

M. Prepare and file U.S. Treasury Department forms 1099 and other
appropriate information returns required with respect to dividends
and distributions for all shareholders;

N. Provide shareholder account information upon request and prepare and
mail confirmations and statements of account to shareholders for all
purchases, redemptions and other confirmable transactions as agreed
upon with the Trust; and

O. Provide a Blue Sky System which will enable the to monitor the total
number of shares sold in each state. In addition, the Trust shall
identify to the Agent in writing those transactions and assets to be
treated as exempt from the Blue Sky reporting to the Trust for each
state. The responsibility of the Agent for the Trust's Blue Sky
state registration status is solely limited to the initial
compliance by the Trust and the reporting of such transactions to
the Trust.

2. COMPENSATION

The Trust agrees to pay the Agent for performance of the duties listed in
this Agreement; the fees and out-of-pocket expenses include, but are not limited
to the following: printing, postage, forms, stationery, record retention,
mailing, insertion, programming, labels, shareholder lists and proxy expenses.

These fees and reimbursable expenses may be changed from time to time
subject to mutual written agreement between the Trust and the Agent.

The Trust agrees to pay all fees and reimbursable expenses within ten (10)
business days following the mailing of the billing notice.

3. REPRESENTATIONS OF AGENT

The Agent represents and warrants to the Trust that:

A. It is a trust company duly organized, existing and in good standing
under the laws of Wisconsin;

B. It is a registered transfer agent under the Securities Exchange Act
of 1934 as amended.

C. It is duly qualified to carry on its business in the state of
Wisconsin;

-2-
<PAGE> 3
D. It is empowered under applicable laws and by its charter and bylaws
to enter into and perform this Agreement;

E. All requisite corporate proceedings have been taken to authorize it
to enter and perform this Agreement;

F. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement; and

G. It will comply with all applicable requirements of the Securities
Act of 1933 and the Securities Exchange Act of 1934, as amended, the
Investment Company Act of 1940, as amended, and any laws, rules, and
regulations of governmental authorities having jurisdiction.

4. REPRESENTATIONS OF THE TRUST

The Trust represents and warrants to the Agent that:

A. The Trust is an open-ended diversified investment company under the
Investment Company Act of 1940;

B. The Trust is a business trust organized, existing, and in good
standing under the laws of Massachusetts;

C. The Trust is empowered under applicable laws and by its Declaration
of Trust and bylaws to enter into and perform this Agreement;

D. All necessary proceedings required by the Declaration of Trust have
been taken to authorize it to enter into and perform this Agreement;

E. The Trust will comply with all applicable requirements of the
Securities and Exchange Acts of 1933 and 1934, as amended, the
Investment Company Act of 1940, as amended, and any laws, rules and
regulations of governmental authorities having jurisdiction; and

F. A registration statement under the Securities Act of 1933 is
currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made,
with respect to all shares of the Trust being offered for sale.

5. COVENANTS OF AND AGENT

The Trust shall furnish the Agent a certified copy of the resolution of
the Board of Trustees of the Trust authorizing the appointment of the Agent and
the execution of this Agreement. The Trust shall provide to the Agent a copy of
the Declaration of Trust, bylaws of the Trust and all amendments thereto.

-3-
<PAGE> 4
The Agent shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the rules thereunder, the Agent agrees that all such records prepared or
maintained by the Agent relating to the services to be performed by the Agent
hereunder are the property of the Trust and will be preserved, maintained and
made available in accordance with such section and rules and will be surrendered
to the Trust on and in accordance with its request.

6. INDEMNIFICATION; REMEDIES UPON BREACH

The Agent shall exercise reasonable care in the performance of its duties
under this Agreement. The Agent shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with matters
to which this Agreement relates, including losses resulting from mechanical
breakdowns or the failure of communication or power supplies beyond the Agent's
control, except a loss resulting from the Agent's refusal or failure to comply
with the terms of this Agreement or from bad faith, negligence, or willful
misconduct on its part in the performance of its duties under this Agreement.
Notwithstanding any other provision of this Agreement, the Trust shall indemnify
and hold harmless the Agent from and against any and all claims, demands,
losses, expenses, and liabilities (whether with or without basis in fact or law)
of any and every nature (including reasonable attorneys' fees) which the Agent
may sustain or incur or which may be asserted against the Agent by any person
arising out of any action taken or omitted to be taken by it in performing the
services hereunder (i) in accordance with the foregoing standards, or (ii) in
reliance upon any written or oral instruction provided to the Agent by any duly
authorized officer of the Trust, such duly authorized officer to be included in
a list of authorized officers furnished to the Agent and as amended from time to
time in writing by resolution of the Board of Trustees of the Trust.

Further, the Trust will indemnify and hold the Agent harmless against any
and all losses, claims, damages, liabilities or expenses (including reasonable
counsel fees and expenses) resulting from any claim, demand, action, or suit as
a result of the negligence of the Trust or the principal underwriter (unless
contributed to by the Agent's breach of this Agreement or other Agreements
between the Trust and the Agent, or the Agent's own negligence or bad faith); or
as a result of the Agent acting upon telephone instructions relating to the
exchange or redemption of shares received by the Agent and reasonably believed
by the Agent under a standard of care customarily used in the industry to have
originated from the record owner of the subject shares; or as a result of acting
in reliance upon any genuine instrument or stock certificate signed,
countersigned, or executed by any person or persons authorized to sign,
countersign, or execute the same.

In the event of a mechanical breakdown or failure of communication or
power supplies beyond its control, the Agent shall take all reasonable steps to
minimize service interruptions for any period that such interruption continues
beyond the Agent's control. The Agent will make every reasonable effort to
restore any lost or damaged data and correct any errors resulting from such a
breakdown at the expense of the Agent. The Agent agrees that it shall, at all
times, have reasonable contingency plans with appropriate parties, making
reasonable provision for emergency use of electrical data processing equipment
to the extent appropriate equipment is available. Representatives of the Trust
shall be entitled to inspect the Agent's premises and operating capabilities at
any time during regular business hours of the Agent, upon reasonable notice to
the Agent.

Regardless of the above, the Agent reserves the right to reprocess and
correct administrative errors at its own expense.

-4-
<PAGE> 5

In order that the indemnification provisions contained in this section
shall apply, it is understood that if in any case the Trust may be asked to
indemnify or hold the Agent harmless, the Trust shall be fully and promptly
advised of all pertinent facts concerning the situation in question, and it is
further understood that the Agent will use all reasonable care to notify the
Trust promptly concerning any situation which presents or appears likely to
present the probability of such a claim for indemnification against the Trust.
The Trust shall have the option to defend the Agent against any claim which may
be the subject of this indemnification. In the event that the Trust so elects,
it will so notify the Agent and thereupon the Trust shall take over complete
defense of the claim, and the Agent shall in such situation initiate no further
legal or other expenses for which it shall seek indemnification under this
section. The Agent shall in no case confess any claim or make any compromise in
any case in which the Trust will be asked to indemnify the Agent except with the
Trust's prior written consent.

The Agent shall indemnify and hold the Trust harmless from and against any
and all claims, demands, losses, expenses, and liabilities (whether with or
without basis in fact or law) of any and every nature (including reasonable
attorneys' fees) which may be asserted against the Trust by any person arising
out of any action taken or omitted to be taken by the Agent as a result of the
Agent's refusal or failure to comply with the terms of this Agreement, its bad
faith, negligence, or willful misconduct.

7. CONFIDENTIALITY

The Agent agrees on behalf of itself and its employees to treat
confidentially all records and other information relative to the Trust and its
shareholders and shall not be disclosed to any other party, except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably withheld and may not be withheld where the Agent may be exposed
to civil or criminal contempt proceedings for failure to comply after being
requested to divulge such information by duly constituted authorities.

8. RECORDS

The Agent shall keep records relating to the services to be performed
hereunder, in the form and manner, and for such period as it may deem advisable
and is agreeable to the but not inconsistent with the rules and regulations of
appropriate government authorities, in particular, Section 31 of The Investment
Company Act of 1940 as amended (the "Investment Company Act"), and the rules
thereunder. The Agent agrees that all such records prepared or maintained by The
Agent relating to the services to be performed by the Agent hereunder are the
property of the Trust and will be preserved, maintained, and made available with
such section and rules of the Investment Company Act and will be promptly
surrendered to the Trust on and in accordance with its request.

9. WISCONSIN LAW TO APPLY

This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the state of Wisconsin.

-5-
<PAGE> 6
10. AMENDMENT, ASSIGNMENT, TERMINATION AND NOTICE

A. This Agreement may be amended by the mutual written consent of the
parties.

B. This Agreement may be terminated upon ninety (90) day's written
notice given by one party to the other.

C. This Agreement and any right or obligation hereunder may not be
assigned by either party without the signed, written consent of the
other party.

D. Any notice required to be given by the parties to each other under
the terms of this Agreement shall be in writing, addressed and
delivered, or mailed to the principal place of business of the other
party. If to the agent, such notice should to be sent to
_______________. If to the Trust, such notice should be sent to
________________.

E. In the event that the Trust gives to the Agent its written intention
to terminate and appoint a successor transfer agent, the Agent
agrees to cooperate in the transfer of its duties and
responsibilities to the successor, including any and all relevant
books, records and other data established or maintained by the Agent
under this Agreement.

F. Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will
be paid by the Trust.

11. Agreement Binding Only on Trust Property

The Agent understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property. The Agent represents that it has notice of the provisions of the
Trust's Declaration of Trust disclaiming shareholder liability for acts or
obligations of the Trust.

Hotchkis and Wiley Variable Trust Firstar Trust Company

By: ______________________________ By: ______________________________

Attest: __________________________ Attest: __________________________
Assistant Secretary

-6-

<PAGE> 1
EXHIBIT 99.B10

GARDNER, CARTON & DOUGLAS
Suite 3400 - Quaker Tower
321 North Clark Street
Chicago, Illinois 60610-4795
(312) 644-3000
Telecopier: (312) 644-3381

January 28, 1998

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Hotchkis and Wiley Variable Trust
Indefinite Number of Shares of Beneficial Interest,
no par value per share

Ladies and Gentlemen:

As counsel for Hotchkis and Wiley Variable Trust, a Massachusetts
business trust (the "Fund"), we have examined the proceedings taken and being
taken for the registration by the Fund on Form N-1A of an indefinite number of
shares of beneficial interest, no par value per share.

We have examined all instruments, documents and records which, in our
opinion, were necessary of examination for the purpose of rendering this
opinion. Based upon such examination, we are of the opinion that the
above-described shares of beneficial interest will be, if and when issued by the
Fund in the manner and upon the terms set forth in said Form N-1A, validly
authorized and issued, fully paid and non-assessable.

We hereby consent to the filing of this opinion as an exhibit to the
Fund's Registration Statement on Form N-1A, as it may be amended.

Very truly yours,

/s/ GARDNER, CARTON & DOUGLAS

<PAGE> 1

Exhibit 99.B11

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 2 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 16, 1998, relating to the statement of assets and liabilities of
the Hotchkis and Wiley Variable Trust, which appears in such Statement of
Additional Information. We also consent to the reference to us under the
heading "General Information About The Trust" in such Statement of
Additional Information.

/s/ PRICE WATERHOUSE LLP

Price Waterhouse LLP
Milwaukee, Wisconsin
January 26, 1998

<PAGE> 1
EXHIBIT 99.B13

HOTCHKIS AND WILEY VARIABLE TRUST

SUBSCRIPTION AGREEMENT

1. Share Subscription. The undersigned agrees to purchase from Hotchkis
and Wiley Variable Trust (the "Fund") the number of shares (the "Shares")
without par value, set forth at the end of this Agreement on the terms and
conditions set forth herein and in the Prospectus ("Preliminary Prospectus")
described below, and hereby tenders the amount of the price required to purchase
these Shares at the price set forth at the end of this Agreement.

The undersigned understands that the Fund has prepared a registration
statement and an amendment thereto for filing with the Securities and Exchange
Commission on Form N-1A, which contains the Preliminary Prospectus which
describes the Fund and the Shares. By its signature hereto, the undersigned
hereby acknowledges receipt of a copy of the Preliminary Prospectus.

The undersigned recognizes that the Fund will not be fully operational
until such time as it commences the public offering of its shares. Accordingly,
a number of features of the Fund described in the Preliminary Prospectus,
including without limitation, the declaration and payment of dividends, and
redemption of shares upon request of shareholders, are not, in fact, in
existence at the present time and will not be instituted until the Fund's
registration statement under the Securities Act of 1933 is effective.

2. Representations and Warranties. The undersigned hereby represents and
warrants as follows:

(a) It is aware that no Federal or state agency has made any findings
or determination as to the fairness for investment, nor any recommendation
or endorsement, of the Shares;

(b) It has such knowledge and experience of financial and business
matters as will enable it to utilize the information made available to it
in connection with the offering of the Shares, to evaluate the merits and
risks of the prospective investment and to make an informed investment
decision;

(c) It recognizes that the Fund has no financial or operating history
and, further, that investment in the Fund involves certain risks, and it
has taken full cognizance of and understands all of the risks related to
the purchase of the Shares, and it acknowledges that it has suitable
financial resources and anticipated income to bear the economic risk of
such an investment;

(d) It is purchasing the Shares for its own account, for investment,
and not with any present intention of redemption, distribution, or resale
of the Shares, either in whole or in part;

<PAGE> 2

(e) It will not sell the Shares purchased by it without registration
of the Shares under the Securities Act of 1933 or an exemption therefrom;

(f) This Agreement and the Preliminary Prospectus and such material
documents relating to the Fund as it has requested have been provided to it by
the Fund and have been reviewed carefully by it; and

(g) It has had the opportunity to ask questions of and receive
answers from, representatives of the Fund concerning the Funds and the terms of
the offering.

3. The undersigned recognizes that the Fund reserves the unrestricted
right to reject or limit any subscription and to close the offer at any time.

Number of Shares. 4,999 Shares at $10.00 per Share of Equity Income VIP
Portfolio; 4,999 Shares at $10.00 per Share of Low Duration VIP Portfolio; 1
Share at $10.00 per Share of Total Return Bond VIP Portfolio and 1 Share at
$10.00 per Share of International VIP Portfolio for an aggregate amount of
$100,000.00

IN WITNESS WHEREOF, the undersigned has executed this instrument this 16th
day of January, 1998.

HOTCHKIS AND WILEY, a division of the
Merrill Lynch Capital Management Group
of Merrill Lynch Asset Management, L.P.

By: /s/ NANCY D. CELICK
------------------------------------

Title: CFO
---------------------------------